Posted by Dave T on November 07, 2002 at 20:10:30:
“The basis and long-term holding period come from the fact that this is inherited property. Also, this isn’t dealer property, because you didn’t acquire it to resell.”
It would be interesting to get a determination on this case. Since only 7 months elapsed between the time Steve inherited the property and the time he sold it on an installment sale, it appears that he had NO intent to hold the property for appreciation or production of income. Instead, it appears that his intent from the beginning was to sell the property immediately - it just took 7 months to find a buyer and get to settlement.
For this reason, I will maintain that this transaction appears to be a dealer disposition. Steve only said that he took a note for 90% of appraised value, but did not say if he received any other consideration for his equity. If he really sold the property at a slight loss, then it may be irrelevant that this is a dealer disposition.
On the other hand, if Steve did receive some other consideration in addition to the note, then all of his “profit” may be taxable in the year of sale. My caution here is that a dealer disposition treatment may apply, and that Steve should be financially prepared for the income tax ramifications.
You also said: “If this is improved property, get the seller’s Social Security number to report the interest as seller-financed mortgage interest on Schedule B of your tax return.”
Overlooking the fact that Steve is the seller and not the buyer, why does it matter whether improved property is part of the transaction to report mortgage interest received (or paid) on a seller held note?
Steve would be well served by consulting his personal tax professional for specific details.
Real Estate Note and Tax Liability - Posted by Steve Nunez
Posted by Steve Nunez on November 03, 2002 at 18:13:33:
I inherited a piece of property in Sep 01. I sold it with a Real Estate Note in Apr 02. The note was approx. $10K less than the appraised value and will be paid over 30 yrs. What is my tax liability on the monthly payments made on this note?
Re: Real Estate Note and Tax Liability - Posted by Diane (TX)
Posted by Diane (TX) on November 06, 2002 at 17:58:17:
Your tax basis is the fair market value on September 1, 2001. If FMV is less than your sales price, you have a long-term capital loss (limited to $3,000 per year - excess carries over). If the interest rate on your note is reasonable, report the stated interest as income. If this is improved property, get the seller’s Social Security number to report the interest as seller-financed mortgage interest on Schedule B of your tax return.
The basis and long-term holding period come from the fact that this is inherited property. Also, this isn’t dealer property, because you didn’t acquire it to resell.
Re: Real Estate Note and Tax Liability - Posted by Dave T
Posted by Dave T on November 04, 2002 at 07:18:51:
First, I assume that the note you are holding bears some stated rate of interest. If this is the case, then the interest you receive during the year is taxable as ordinary income. If you have an amortizing loan, then the amount you receive in addition to the interest payments is return of principal and is non-taxable.
You did not suggest this in your post, but if you sold the property for more than your cost basis, then you may have a dealer disposition. If so, then all of your profit on the sale is taxable income this year.