Installment sale or rent?

[Possi]

My client has an apartment building that was in the family, and he has owned and rented the apartments for many years.

Last year, someone wanted to buy it, and he wanted to sell it. There is a family member who had some portion of ownership on the books, whom that nobody ever knew about, and they are unable to track her down to release the deed so client can sell.

In the meantime, "buyer" pays client one rental fee annually of $6000 and another $6000 "toward the sale."

Since client doesn't have the right to sell the property, I have left this as rental property and used all $12k as rental income. When he sells it, he can reduce the selling price as he wishes, if he wants to reduce it by the rent paid that was "toward the sale." He is not collecting any interest, there are no selling papers done, nothing in writing, because they can't track this chick down.

I hope someone will tell me, "great job, you are right!" by not doing an installment sale.

 

[BHoffman]

What happens to the extra $6,000 when he can't find the chick and has to refund the money?  He can't sell what he doesn't own.  I would advise the client to put the funds in some sort of escrow account where he has no constructive receipt and leave it there until this shakes out.  And in the future, the buyer should be paying the $6,000 to the account custodian and not directly to the client.

[Possi]

1 hour ago, BHoffman said:

What happens to the extra $6,000 when he can't find the chick and has to refund the money?  He can't sell what he doesn't own.  I would advise the client to put the funds in some sort of escrow account where he has no constructive receipt and leave it there until this shakes out.  And in the future, the buyer should be paying the $6,000 to the account custodian and not directly to the client.

That's a great point. I'll have that discussion with him.

[BHoffman]

Glad you like it.  Your client might prefer that arrangement to risking fraud charges brought by the buyer for accepting funds without actually having the right to sell the property.  Not to give legal advice, but if it was me, I would want a contract that spells out the contingency to the buyer so he informed and that funds plus interest will be refundable if the seller is unable to obtain proper title.  This is a very stinky arrangement. 

[schirallicpa]

I had a similar situation but in my case I was at the end of the contract to buy, and the previous accountant had set up the installment agreement to buy as rental income.  So instead of having installment cap gain and interest, he was showing rental income and deducting depreciation.  A sticky mess to untangle.  

In your situation, I agree that the deposit should be held in escrow and sounds like no valid contract yet.  May consider putting on extension until they find the missing shareholder.

 

[Possi]

Honestly, this is an old man and that gal will likely never be found. If she is found, who knows if she will agree to the sale? It's really sticky, and I too would want an contract with a contingency in case he never gains proper title.

[Lynn EA USTCP in Louisiana]

One of my clients had several rental properties.  One year her husband disappeared.  When she filed for divorce, the court appointed a curator for him in absentia to deal with the property division.

 

[schirallicpa]

interesting.  will keep that strategy in mind.  I have a husband who is awol.

well - not mine own, although it would be nice....