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Merlo
Merlo, Accountant
Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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What income tax is due on a land sale of $500,000 payable $50,000

Customer Question

What income tax is due on a land sale of $500,000 payable $50,000 annually for ten years?
Submitted: 6 years ago.
Category: Tax
Expert:  Merlo replied 6 years ago.

Hello robertson,

 

If you are selling property on an installment plan basis, you would only pay tax on the portion of the gain that you have each year. Your gain would be figured by taking the sale price less your basis, less the cost of any selling expenses such as RE commissions. Your basis in the land would be whatever you originally paid for it plus the cost of any improvements you may have made such as grading, adding roads, etc.

 

As an example, let's assume your basis is $200,000 and you sold the land for $500,000. You would have a gain of $300,000. Since you are selling this on an installment sale of equal payments over a 10 year period, you would pay long term capital gains tax on $30,000 each year for the next 10 years. The actual amount of tax you pay will depend on the what the long term capital gains tax rate is each year. For the 2010 tax year the rate is 15%, but it is scheduled to increase to 20% in the year 2011. It is impossible at this point to say what the rate may be beyond that point.

 

 

Thank you robertson

 

 

Customer: replied 6 years ago.

I

 

MERLO---- YOUR ANSWER IS EXTREMELY HELPFUL..... my involvement is a labor of love for an elderly man scared that he can't make things work for himself and his wife....

 

The land on the books is about $100,000. The man's only income is S.S. The developer would like to buy the land for $200,000, and if everything works out, then give him the additional $300,000 as a consultant. It is incredibly speculative. Of course, when everything works out, the land is worth $750,000.. And the developer needs this man because of the politics....

 

But back to the tax problem----- if given a choice, and betting on the success of the efforts--- which works best for this loving, aging, couple?

Expert:  Merlo replied 6 years ago.

Hello again robertson,

 

I apologize, but I am not quite sure I understand exactly what your question is here. You said you are selling the land for $500,000 but now you talk about different figures.

 

Regardless of the amount you sell the land for or the number of years that the payout would be over, it would still be taxed as an installment sale, with only the applicable percentage of the gain taxed in the actual year the payment is received.

 

If in addition to the actual land sale this person is paid fees as a consultant, those fees would be taxable as ordinary income which would be a much higher rate. So from that standpoint it would be better for him just to have this treated as sale of land which would be taxed at the lower capital gains tax rate.

 

f this does not answer your question, then please tell me more specifically what the situation is here.

 

 

Thank you robertson

 

 

Customer: replied 6 years ago.

 

 

So what % tax is due on the installement to the tate of California and IRS?

Expert:  Merlo replied 6 years ago.

Hello again robertson,

 

The gain on the sale would be taxed as a long term capital gain. For the year 2010, the IRS tax rate for long term capital gains is 15%. But that rate is scheduled to increase next year in 2011 to 20%. So for installments received in 2010, the gain would be taxed at 15% for federal tax and then in 2011 would increase to 20%. It's impossible to say what future years might bring as far as changes in this tax rate, but that is what is currently in effect and is set to take place in 2011.

 

As far as CA state tax, there is no special capital gains tax rate. The gain each year would simply be taxed at ordinary income tax rates and will depend on the taxpayer's total other income for the year as to what bracket that places him in. If the only taxable income he has each year is from the gain on the installment sale, then he would likely pay somewhere around 5% in CA state taxes.

 

 

Thank you robertson