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Installment sale can benefit the seller's tax situation


Dear Mr. Gisriel:

My partner and I own a small strip retail shopping center. We recently received an offer to purchase the shopping center by a buyer using an installment purchase. What are the tax consequences to me if we sell by means of an installment sale?

Tom Allen

Ellicott City

Dear Mr. Allen:

Generally speaking, the tax consequences of the installment sale of real estate do benefit the seller. The tax code permits sales of real property to be reported on the installment method, thereby spreading the gain over the life of the note receivable. But not all taxpayers qualify for installment sale reporting and not all property qualifies for installment reporting; and, in some cases, not all of the gain may be deferred.

A brief summary of the rules for reporting real estate on the installment method is as follows:

* The seller does not need to make a formal election to use the installment method. However, he must make an election to not have the installment rules apply.

* A real estate dealer (as opposed to an investor or operator) cannot use the installment method.

* Any amount can be received in the year of sale.

* Only one payment beyond the year of sale need be received.

* Debt on the property that exceeds the basis of the property sold is treated as a collection of proceeds in the year of sale.

* Sales with a contingent sales price can be reported on the installment method.

* A seller using the installment method must pay interest on the tax deferral if the face amount of all installment obligations that arose during the year totals more than $5 million.

* Pledging the installment note receivable may trigger the deferred gain.

* A disposition of the installment note receivable can trigger the deferred gain.

* A substantial modification of the installment note receivable can be deemed to be a disposition.

* The installment method can be used for the alternative minimum tax.

* Installment reporting is not permitted if the sale is to a related party who sells the property either for cash or a more favorable installment note.

Dear Mr. Gisriel:

My husband and I were a week late with a mortgage payment and were charged a $45 late fee. Can we deduct it on our tax return?

Evelyn Lyle


Dear Ms. Lyle:

A late-payment penalty is never deductible because it is merely a fine.

A prepayment penalty that is levied when a borrower pays off a loan ahead of schedule is fully deductible, but prepayment penalties are illegal in Maryland for residential loans over 8 percent.

Dear Mr. Gisriel:

I am interested in information about reverse mortgages.

Mary Stone


Dear Mrs. Stone:

To qualify for a reverse mortgage, you must be at least 62 years old, occupy the house as your principal residence and own the house free and clear. If there is a small mortgage balance or lien, the reverse mortgage proceeds must be enough to pay it off.

The proceeds can be received in the form of regular monthly payments to you, a line of credit or a lump sum.

For more information, you can contact the American Association of Retired Persons at (202) 434-2277.

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