Land sale with note

[TAXMAN]

OK Here's what we got. TP loans to A 35k and holds land as collateral. A pays for 4 years and defaults. TP takes land 2012 and sells for 26k in 2014.( A still owed TP 26k). Land had a FMV of 30k at time of foreclousure in 2012.

 

Futher research shows that TP DID NOT REPORT interest as income. This all took place between 2008 and 2012 except for the sale.

 

How would you report this transaction due to the interest not being reported? Your thoughts.

 

Thanks all.

[Jack from Ohio]

TP should have been reporting as an installment sale and reporting interest.

 

TP must show the sale of the land using his basis and a sale price of $35K.  Any gain would be taxable.  Facts and circumstances would determine whether it is ordinary income or capital gains.

 

TP must also claim all interest received as interest income.  FMV at time of the sale has no bearing whatsoever.

 

This is another situation not to overthink.

[TAXMAN]

Jack, TP did not own the land originally. A owed the land and borrowed the 35k using the land as colatteral. A used the funds to do other things which are no concern to me. I agree that the basis in the land to TP will be what ever the balance on the note would be. However what to do with all that unreported interest? Sch b 2014 showing all of it? Thanks

[BulldogTom]

Is the loan fully documented?  If so, what is the interest rate on the note?  The payments A made to TP included interest, whether TP took them into interest income or not.  Sounds like TP needs to amend the open years to reflect the interest.  It is conceivable that there is no interest on the note, and therefore no interest to report, but the note will tell you that.

 

The next part, the foreclosure, is pretty simple.  I assume TP is cash basis tax payer, so the interest owed at time of foreclosure is irrelevant.  A owed TP X number of dollars on the note.  A transfered the property to TP in full satisfaction of the note.  TP has "purchased" the land in the year he foreclosed, for the amount owed on the note and this is his basis.  When he sold the land, he has gain or loss calculated in the normal way.

 

There was no sale at the time of the loan being made, it was just a loan, not a transfer of property, so there is no installment sale.  There is no sale until the time of the foreclosure.

 

Tom

Newark, CA

[Lee B]

Is the loan fully documented?  If so, what is the interest rate on the note?  The payments A made to TP included interest, whether TP took them into interest income or not.  Sounds like TP needs to amend the open years to reflect the interest.  It is conceivable that there is no interest on the note, and therefore no interest to report, but the note will tell you that. . . . . . . . . .

 

Tom

Newark, CA

Tom,

 

I agree with everything you said, except that when there is no stated interest, that IRS "Imputed Interest Rules & Regulations" will apply which means that prior years returns will need to be amended .

[BulldogTom]

Tom,

 

I agree with everything you said, except that when there is no stated interest, that IRS "Imputed Interest Rules & Regulations" 

will apply which means that prior years returns will need to be amended .

I agree with everything you said cbslee.....I should have caught that myself.  Sometimes I should preview before I post.

 

It would be very rare to see a note from unrelated parties to have no interest.  What in the H3!! was I thinking.

 

Tom

Newark, CA

[easytax]

Tom, cbslee,

 

Was Tom thinking that there was "deferred interest" - payable in say 2012?  I ask, because I do not know if that would be OK. Would interest incurred BUT deferred to be payable later be allowed?  or would the imputed interest "kick-in" as far as the IRS is concerned.

 

Inquiring (confused as to tax effects) minds want to know?

 

Thanks.

[jklcpa]

From the original post, it is not clear whether the loan had a stated rate of interest or not, and also not clear whether or not interest was actually received. All we know from the way the post is worded is that interest income was not reported by the TP on tax returns.

Edited December 23, 2014 by jklcpa
deleted stuff not making sense, been sick, brain fried

[kcjenkins]

I would amend to report the interest.  Agree with Tom on the sale.

[TAXMAN]

There was interest on the note. TP just never bothered to report it in all the closed years. tp did receive those payments. Yikes what kind of animal have I discovered when all questions are asked?

[Jack from Ohio]

There was interest on the note. TP just never bothered to report it in all the closed years. tp did receive those payments. Yikes what kind of animal have I discovered when all questions are asked?

Request of the Taxpayer to amend and pay the tax due.  It is the CORRECT thing to do.  If he chooses not to, I would draw up a simple document stating that you recommended the amendments and he chose not to do it.  Have him sign it.  You can only inform him.  The note is a CYA if the IRS comes calling for some reason.

[kcjenkins]

And if he does not agree to amend, you just wash your hands of him.

[Jack from Ohio]

There was interest on the note. TP just never bothered to report it in all the closed years. tp did receive those payments. Yikes what kind of animal have I discovered when all questions are asked?

 

Request of the Taxpayer to amend and pay the tax due.  It is the CORRECT thing to do.  If he chooses not to, I would draw up a simple document stating that you recommended the amendments and he chose not to do it.  Have him sign it.  You can only inform him.  The note is a CYA if the IRS comes calling for some reason.

 

And if he does not agree to amend, you just wash your hands of him.

Agree 100% with KC.