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I am selling some farm land with x amount down and financing…

Customer Question
I am selling some...

I am selling some farm land with x amount down and financing the remainder under a contract. How will charging interest affect my tax liability? Also, how will the capital gains work when comparing the current value with the value when it was inherited? Since we won’t be getting the full value all at once.

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

I’m not sure.

Submitted: 2 months ago.Category: Tax
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Answered in 9 minutes by:
12/16/2017
Tax Professional: emc011075, Tax adviser replied 2 months ago
emc011075
emc011075, Tax adviser
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Satisfied Customers: 3,388
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Hi. My name is ***** ***** I will be happy to help you.

Every payment you receive will be divided between principal and interest. The interest will be your income. Capital gains are separate subject. With every payment you will report percentage of capital gains. For instance, if your sales price is 400K and the fair market value on had of inheritance was 300K, you have 100K of capital gains. With every payment, 25% will be considered capital gains and 75% nontaxable repayment of principle.

So, lets say you sell the land for 400K and receive 200K in downpayment, 25% or 50K of the downpayment will be capital gains. The same logic will apply to all payments.

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Customer reply replied 2 months ago
Thank you. Let me just make sure I understand. If the land is now worth 900,000 and was worth approximately 600,000 when inherited 13 years ago. The downpayment is 250,000 with the balance paid over 20 years. What is the first years liability? $62,500? Does it make more sense to not charge interest?
Tax Professional: emc011075, Tax adviser replied 2 months ago

Ok. Your capital gains represent 33% of the proceeds. From the downpayment, 82,500 will be capital gains. The remaining balance of 650,000 will be paid over 20 years, or 32,500 + interest. Out of 32,500, 10,725 will be capital gains. At the end of the first year you will have 93,225 in capital gains and interest your charge.

You will have to charge interest, otherwise the IRS will not consider it an installment sale and will treat it as sale in one year.

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