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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 534
Experience:  Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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Im trying to file a delinquent return for my 78-year old mother

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I’m trying to file a delinquent return for my 78-year old mother and don’t know how to properly report a complicated sale of a rental property. My mother inherited 50% of a rental property in 1994. The rental property consisted of a house on about 1 acre, some outbuildings and 18 acres of farmland. The assessed value in 1994 was $243,000 for the land, and $136,800 for the house and outbuildings, giving my mother cost basis of $189,900 for her 50%. The house and farmland had been rented out to various tenants and agricultural concerns until 2008. The rental has been depreciated on a 27.5 yr schedule. In 2008, my mother decided to sell her 50% of the property to her niece, for $191,350 = $62,500 (house + 1 acre homesite) + $128,850 (8.59 acres at $15,000/acre), and rights to share in any profits from sale of up to 8.59 acres of the land if it was sold for development purposes within the subsequent 20 years. Her rights ‘depreciate’ 5% per year, starting at 95% of the (sale price - $15,000/acre) in 2008, and decreasing to 5% of the (sale price - $15,000/acre) in 2026. Sale in subsequent years would result in no sharing of profits for her. Her niece obviously has incentive to not develop the land for as long as she can avoid it, although the other 50% owner, my mother’s brother, may push to develop it in the next 10 years to help fund his retirement. What value should we record for the sale of the property for tax purposes, and how should we record the development participation agreement? Should the taxes on the sale just be based on the cash rec’d ($191,350), or should the participation rights be ascribed some value? If they are treated separately, does the participation agreement count as a capital asset that she is holding, so that future payments would be considered long-term capital gain?

Robin D :

Hello and thank you for using Just Answer,
Your question was very interesting. Should the taxes on the sale just be based on the cash rec’d ($191,350), or should the participation rights be ascribed some value?

I see no value you could assign to the possible future actions. It appears your grandmother had a sale of rental and if in the future there are payments to her then those would be more in the nature of a royalty and not capital.

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13585
Experience: 15years with H & R Block. Divisional leader, Instructor
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You are cash basis taxpayers under the Internal Revenue Code. The sale should be reported as a sale at the time of the sale, with the proceeds being the cash received, the sales price. Any uncertain future amounts are not consequential. Any amounts received in the future would be reported as taxable if and when received.

taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 534
Experience: Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and other Tax Specialists are ready to help you
Hi,
Do not forget that your grandmother has to deal with the depreciation that was claimed on the rental. This is called recapture and will be taxed at regular rates in the year of sale.
If your grandmother was not allowed to use all her losses in the past they can be used for the year of sale.
Unfortunately, per my original post, the future possible payments are not relevant for your grandmother in the year of sale.
Customer: replied 3 years ago.

Thanks -- yes, I know I've got to also deal with the recapture, but didn't want to complicate the question. Thanks for the prompt response!

You are most welcome.
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