Farm Property Sold

[Dan]

Question:

On November 1, 2018 a personal property sales agreement was made whereas the seller agrees to sell to buyer and buyer hereby agrees to purchase from seller the described farm property at a total price of $200,000.  The payment of that $200,000 was to be given to the seller over 4 years with first payment starting on July 1, 2019 and the next payments on January 1 in 2020, 2021 and 2022.  The payment each year for those 4 years would be $50,000.  

My question is:  What is the proper way to report this income?  Can you report the income from the sale over 4 years?  Thank you for your reply.

[Dan]

To the above question, no 1099 and etc. has been received or given and I doubt if one is ever received or given.

[Dustan]

I think you need Form 6252, which does report the income actually received in each year. If there was depreciation taken, you may have extra depreciation recapture in the first year.

[Gail in Virginia]

And there will also be interest to report on a sale that lasts three and a half years, even if the contract does not call for interest.  In that case, part of the proceeds have to be considered imputed interest from every payment except the down payment.

[Lee B]

 Dan says this is personal property, which I have dim memories of the TCJA limiting the use of Form 6252 to only real property. 

[Lion EA]

Was the property a FARM in the hands of the seller? Or, was it ONLY a personal residence? Investment/inherited property? Rental?

[DANRVAN]

22 minutes ago, cbslee said:

 Dan says this is personal property, which I have dim memories of the TCJA limiting the use of Form 6252 to only real property. 

Are you thinking 1031's of personal property no longer allowed?  

[Catherine]

This sounds to me like installment sale; read the rules on installment sales.  There can be different types of gain.  Depreciation recapture (ordinary income) is taxed in the year of sale (even if there was less cash paid than depr recap'd, which can be nasty).  You'll need to calculate gross profit percentages and capital gain deferrals.  

[Dan]

Thanks for all your responses.  The reason I have not responded back is because I was looking for a new computer, one that had windows 10.  We need windows 10 now in order to install ATX program for 2019 tax year. 

The contract that I received had the words (Personal Property Sales Agreement).  It was a farm machinery sales agreement with no money received in 2018.  Money was to be paid in 4 years with the first payment in 2019 and the next payments in 2020, 2021, and 2022.  No interest was or will be received on this sale.

Question:  Do you still think form 6252 should be used or can you use form 4797 since this is sales of business property?

This property was used in farming operation.

[Lion EA]

If your client wants to report ALL his profit in the first year, he does not have to report it as an installment sale. Haven't had that happen. Read what Gail told you about interest.

[DANRVAN]

On 11/21/2019 at 5:50 AM, Dustan said:

If there was depreciation taken, you may have extra depreciation recapture in the first year.

That can be brutal if the property is fully depreciated. 

By the way, welcome to the board Dustan!

[bbstacker]

It appears to be the sale of Section 1245 property.  The fact that is was used in a farming operation is of no importance.  If the selling price of each piece of equipment does not exceed its original purchase price, the sale is not eligible for an installment sale.  If the selling price of a piece of equipment happens to exceed its original purchase price, the gain over the original purchase price is eligible for installment sale treatment.  It is likely that the gain reported will consist solely of depreciation recapture and is reported in the year of sale without regard to the amount of proceeds received.  If there are instances where the selling price exceeds the original purchase cost, it will require Forms 4797 and 6252,  if the installment sale is elected for the portion greater than the original purchase cost.  If the sale generates depreciation recapture only, the sale is reported on Form 4797.

From IRS Publication 544

If you report the sale of property under the installment  method,  any  depreciation  recapture
under section 1245 or 1250 is taxable as ordinary  income  in  the  year  of  sale.  This  
applies even if no payments are received in that year. If the gain is more than the depreciation
recapture income,  report  the  rest  of  the  gain  using  the rules  of  the  installment  
method.  For  this  purpose, include the recapture income in your installment  sale  basis  to  
determine  your  gross profit on the installment sale.
If you dispose of more than one asset in a single transaction, you must figure the gain on each
asset separately so that it may be properly reported.  To  do  this,  allocate  the  selling  price
and  the  payments  you  receive  in  the  year  of sale to each asset. Report any depreciation re-
capture income in the year of sale before using the installment method for any remaining gain.  For
a detailed discussion of installment sale see Pub. 537.

See Gail's comment about the interest on the sale.

[Pacun]

On 11/21/2019 at 11:13 AM, DANRVAN said:

Are you thinking 1031's of personal property no longer allowed?  

Correct.

 

[Dan]

Thanks to all your responses.

[Edsel]

On 11/23/2019 at 12:03 PM, bbstacker said:

If you report the sale of property under the installment  method,  any  depreciation  recapture
under section 1245 or 1250 is taxable as ordinary  income  in  the  year  of  sale. 

I'm new to the conversation, but depreciation recapture under section 1250 may need definition.  It is my understanding that the only depreciation "recapture" for s. 1250 property is the depreciation that exceeds straight line.  This is practically impossible unless there is the old ACRS depreciation which was in effect before 1988. 

The notion of "recapture" for s. 1250 should be replaced by some other nomenclature - perhaps "Unrecaptured section 1250 gain" or some such.

Selling a building for $300,000 - Original Cost $200,000 - Depreciation $75,000, $5000 of which (somehow) is in excess of SL means:

Capital Gain $100,000 eligible for Installment treatment

Depreciation Recapture $5000 - ordinary income per 4797 and not eligible for installment treatment.

Unrecaptured section 1250 gain $70,000 subject to capital gains (ceiling of 25%) and eligible for Installment treatment.

This is my perception.  Someone please correct me if I'm wrong.

 

[Pacun]

I think we are talking about the disposition of the asset. If that's the case, we need to recapture depreciation and report it as ordinary income.

As you know, you have a building that cost you $100K and sold for $200K and you had taken depreciation for $50K, you have to recapture that depreciation.

[DANRVAN]

On 11/28/2019 at 9:21 PM, Edsel said:

Unrecaptured section 1250 gain $70,000 subject to capital gains (ceiling of 25%)

It is ordinary income subject to max of 25%

[Edsel]

23 hours ago, DANRVAN said:

It is ordinary income subject to max of 25%

Drake assigns "unrecaptured s.1250 gain" to Schedule D and a ceiling of 25%

There can be recapture of depreciation on certain items (such as personal property) which does become ordinary income.

[DANRVAN]

9 hours ago, Edsel said:

Drake assigns "unrecaptured s.1250 gain" to Schedule D and a ceiling of 25%

But notice it is taxed at ordinary rates.   

However, it does offset capital losses so it is a hybrid of sorts.

Capital gain taxed at maximum ordinary rate of 25%.

 

[schirallicpa]

If the farm personal assets were not used as depreciable business assets, why would any of it be reported?  No different than selling your car or your snowmobile or having an auction.  Occasional personal sales aren't taxed.

[DANRVAN]

40 minutes ago, schirallicpa said:

Occasional personal sales aren't taxed.

You might be thinking of losses from sale of "personal use assets" not allowed.

However gain is reported.  Basis is usually higher than fmv in most cases so there is no gain.

[Edsel]

I believe in this conversation, "personal property" attaches to business property which is not real property.  Local tax authorities are very much interested in "personal" property and collect "personal property taxes" on business property as a separate billing from real estate taxes.

Indeed, if it is personal non-business property is being sold (e.g. snowmobile), it should not even be reported on 4797, but if there is a gain (sale of snowmobile exceeds cost), I believe IRS wants profit reported on a Sch D.  I haven't had any such reporting in a long time, but this can happen on an automobile.