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MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2342
Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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Taxpayer trades his property with AB of 750K, 200K purchase ...

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Taxpayer trades his property with AB of 750K, 200K purchase money mortgage and another 200K mortgage taken out just before sale that will be assumed by buyer. in the exchange, taxpayer will receve a 400K installment note, property worth 700K(AB of 200K) and a 100K mortgage attached to the property. My question is: will my sale price include the additional mortgage taken out just before the deal. in other words, is the additional 200K mortgage considered qualifying indebtedness. FYI the buyer and seller agreed that seller would take out the mortgage just so the buyer could assume it. Also, since the basis in the property transferred is more than the fair market value of the porperty received, i do have an excess basis of 50K. So, i can only reduce my contract price by an amount not to exceed the excess basis which is 50K? Despite the fact that my net qualifying indebtedness is either 300K or 100K?
Submitted: 9 years ago.
Category: Tax
Expert:  MequonCPA replied 9 years ago.

Dear jmanefiore -

My analysis of your transaction is that you are selling a property with a fair market value of $1,450,000. It has mortgage debt of $400,000 that will be assumed, for a net of $1,050,000.

You are receiving a parcel with a fair market value of $750,000 subject to a mortgage of $100,000 and a note in the amount of $400,000, for a net of $1,050,000 ($750K + $400K - $100K).

Your sales price is $1,450,000 with a gain of $700,000. You are receiving a note of $400,000, net relief of indebtedness of $300,000 ($200K + $200K - $100K) and property with a value of $750,000. The like kind property is only $750K thus $700K will be fully taxable.

You may be able to use the installment method for the portion of the gain that relates to to installment loan.

Customer: replied 9 years ago.
Reply to Steve's Post: the property received has a fair market value of 700K and the property given up has a fair market value of 1.4M. The buyer thus gives up 700K worth of proeprty wtih a 200K basis and a 100K mortgage on the land, as well as 400K installment note in exchange for property worth 1.4M with a 750K basis, and subject to 400K in mortgages.

I am doing an installment sale. My question is if the seller is giving up 400K of mortgages but taking on 100K mortgage, is my sale price the value of the 400K installment note plus net mortgage relief (300K) or is it the total mortgage debt that is assumed by the buyer (400K)?

Also, the 400K mortgage debt consists of 2 mortgages, one for 200K and the other is also for 200K but the sencond mortgage was taken out in contemplation of the sale and wasn't put back into the building. So would that even be considered within the sale price if its not defined as qualifying indebtedness?

Right now i have a SP of 700K (400 note plus 300 net indebtedness assumed by buyer)

KP of 650 (700 sell price - indebtedness not exceeding 50K of excess basis)

GP of 650 (700 sell price - excess basis of 50K)

GPP: 650/650 - 100%

but it seems that there is equally valid possibility that the Sale price remains 800K (400 installment note + 400 indebtedness assumed by buyer)
SP: 800K
KP: 400K
GP: 400K - 50K = 350
GPP: 350/400 = 87.5%

Under this calculation, i recover the 50K of excess basis and my gross profit equals the amount of gain over the four years.
Expert:  MequonCPA replied 9 years ago.


Your sale price is $1.4million. Your gain is $650K.

You are receiving like kind property of $700K. Therefore you are receiving other property worth $700K. Because of this 100% of your gain will be taxable.

Your gross profit percentage is 46.4285% (650/1400). In the year of the sale you are receiving real estate worth $700K and net debt relief of $300K for a total of $1million. The gain to report will be $464,285. The balance of the gain will be reported as the principal on the $400K note is received.

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