Posted by Tom Bazley, CPA on February 21, 2004 at 09:20:06:
How you report this transaction depends on whether this was dealer property, or investment property. Did you but the property w/ the intent to resell at a profit? If so, you report your gain on the sale in the year of the sale. Your monthly payments are irrelevant. If your purchase price was $30,000 & you sold it for $50,000, you have a $20,000 gain to report on your 2003 tax return. Doesn’t matter that you’re receiving & making payments. There’s a bright side. Your gain is the amount of cash you received plus the FMV of any property received. What’s the FMV of your note? I bet it’s not nearly the same as the face amount of the note. The rest of the gain will be reported as interest under the OID rules. Your interest expense will be deductible.
Was the property purchased as an investment & you decided to sell to replentish cash reserves, or some other reason? Then, you can report the gain using the installment method. Meaning a portion of the principal payments received each year will be taxable as gain. The entire interest will be interest income to you. The amount of your payments that is interest will be deductible as investment interest, up to the amount of interest income.