Posted by Roger Garay, E.A. on June 04, 2004 at 19:21:15:
TAX TREATMENT:
Assume the property is held for investment (i.e., not used as a rental so the example is not complicated by depreciation recapture issues), and you are selling on installment. IRS Form 6252, Parts I and II, will guide you through the reporting of Principal received, calculation of profit percentage, and taxable amount to transfer to Form 4797 Part I (long term) and from there to Schedule D. (In each future year you use the same Form 6252 (Part II only) to report the full amount of Principal received, and apply the profit percentage computed in the year of sale to report the taxable gain for that year.) In the above case, assume a selling price of $11,800 and a basis of $10,000 for a profit percentage of 18%. Further assume the Principal amount received is $2,000 so the reportable gain this year is $360 (to be taxed at capital gain rates).
BOOKKEEPING ENTRIES (Cash Basis Taxpayer)-Year of Sale:
Debit CASH (for Principal Received) $2,000
Debit NOTE RECEIVABLE (for balance of Note excluding interest) $9,800
Credit INVESTMENT (to the extent of basis) $10,000
Credit REALIZED GAIN FROM SALE OF ASSETS (profit amount taxable this year)$360 (on your P&L)
Credit DEFERRED INCOME (on your Balance Sheet-Equities)
$1,440.
Yes, there are other labels you can use as long as they convey the intent of what you are doing.
BOOKKEEPING ENTRIES-Year 1 of Note:
The following year you receive another $2,000 (of which another $360 is taxable)
Debit CASH $2,000
Credit NOTE RECEIVABLE $2,000
Debit DEFERRED INCOME $360
Credit REALIZED GAIN FROM SALE OF ASSETS $360
Hope this helps.
Roger