INSTALLMENT SALE ???

[TAXMAN]

TP and spouse hold a first deed of trust on an installment agreement with taxable gain. (form 6252) Spouse becomes very mentally challenged. TP and attorney decide it would be better that he hold the installment note sole holder. TP and original buyer go into their bank accounts gets out enough $ to pay off note. Attorney holds money in escrow. Attorney rewrites first deed of trust to TP only. Returns money back to tp and buyer. (same amounts). The terms and amounts of the first note never changed. Attorney said he had to show that first note got paid off even though it really didn't. TP got his money back and so did the buyer according to the closing statement. What the heck do I have? Things attorneys and TP's do to protect assets. A check through the TP'S bank statements proves he didn't get any extra money. Your help in what to report if any thing.

[Catherine]

All I can say is, "When in danger, or in doubt, run in circles, scream and shout!"

Really, in this case follow the money trail and report the money accurately. What else can you do?

[Lee B]

My first knee jerk response is, isn't this a gift?

My second knee jerk response is, how do you do this if one spouse is very mentally challenged?

My third knee jerk response is, they tried to be too cute and may have outsmarted themselves.

[TAXMAN]

After discussion with elder tax attorney his thoughts. TP and spouse were paid off regardless of where $ came from thus creating taxable income. I went and got a copy of the closing and at the very top it indicates PAYOFF. I guess TP was too smart. Now they owe IRS. MY cya is now covered.

[Abby Normal]

27 minutes ago, TAXMAN said:

After discussion with elder tax attorney his thoughts. TP and spouse were paid off regardless of where $ came from thus creating taxable income. I went and got a copy of the closing and at the very top it indicates PAYOFF. I guess TP was too smart. Now they owe IRS. MY cya is now covered.

Essentially, this was a refinancing, and you've swapped one installment note for another. I would not treat this as paid off, but just continue with the installment sale.

[Lee B]

46 minutes ago, Abby Normal said:

Essentially, this was a refinancing, and you've swapped one installment note for another. I would not treat this as paid off, but just continue with the installment sale.

Even thought the taxpayer and spouse held the first deed of trust and now the deed of trust is held only by the the taxpayer.

I would say this is just a bit more than a refinancing.

[Abby Normal]

You often refi to add or remove a lender or a borrower.

The bottom line to me is that the lender did not get paid off. They are still owed the money. This was a legal maneuver to remove one lender. Yes, it probably could have been done by an assignment instead of how this lawyer chose to do it, but the intention was the same.

[Catherine]

Especially since this was between spouses, I have no problem with it being an installment sale refi.

[Lee B]

Typically we see the removal or addition of a spouse when their home or a vacation home involved.

Whereas this involves an Income Producing Asset.

[jklcpa]

I'd say it's a nonevent. Money was held in escrow and then given back to purchaser.

From Pub 537:

Quote

Disposition of an Installment Obligation

A disposition generally includes a sale, exchange, cancellation, bequest, distribution, or transmission of an installment obligation. An installment obligation is the buyer's note, deed of trust, or other evidence that the buyer will make future payments to you.

blah, blah, blah...and then further on down...

Quote

Transfer between spouses or former spouses.

No gain or loss is recognized on the transfer of an installment obligation between spouses or former spouses if the transfer is incident to a divorce. A transfer is incident to a divorce if it occurs within 1 year after the date on which the marriage ends or is related to the end of the marriage. The same tax treatment of the transferred obligation applies to the transferee spouse or former spouse as would have applied to the transferor spouse or former spouse. The basis of the obligation to the transferee spouse (or former spouse) is the adjusted basis of the transferor spouse.

 

[TAXMAN]

update to all. First thanks for all the insight. TP and attorney have for tax purposes decided to treat it as paid off so that his heirs would only have to pay on the interest when TP dies instead of continuing the installment sale. TP is in very bad health and spouse just recently passed on. Is their an election for this?

[Lee B]

Interesting result after all of this discussion.

[DANRVAN]

On 4/12/2022 at 3:35 PM, TAXMAN said:

The terms and amounts of the first note never changed.

Looks to me like the TP is in the same position he started in, except he now holds full title to the contract instead of joint and incurred a bunch of legal fees.  

 

13 hours ago, TAXMAN said:

decided to treat it as paid off so that his heirs would only have to pay on the interest when TP dies instead of continuing the installment sale.

How is that possible if the terms and amounts never changed?  Looks to me like there is still a contract that includes principal and interest.

[Gail in Virginia]

If i am understanding it, the entire amount of gain on the installment sale will be recognized this year because the installment sale has been converted to a regular promissory note.  Principal and interest will continue to be paid, but only the interest will be recognized as taxable income going forward.  That way the heirs will not have an installment sale to deal with, just interest income on the note. 

[DANRVAN]

13 minutes ago, Gail in Virginia said:

the entire amount of gain on the installment sale will be recognized this year because the installment sale

That is a good point.

My thinking is substance over form, but certainly need to look at the legal aspect of the transaction.

So now who hold legal title to the property?

Does taxpayer have any security?

[jklcpa]

15 minutes ago, DANRVAN said:

That is a good point.

My thinking is substance over form, but certainly need to look at the legal aspect of the transaction.

So now who hold legal title to the property?

Does taxpayer have any security?

 Taxman's original post said that the deed of trust was rewritten, so I think that would provide a security interest.

[jklcpa]

Also wanted to add this is been a very interesting discussion. I've learned something from from these posts and topic. Thx.

[DANRVAN]

37 minutes ago, jklcpa said:

 Taxman's original post said that the deed of trust was rewritten, so I think that would provide a security interest.

Thanks for pointing that out, so it appears legal ownership did not pass to the buyer.  And there is still an installment contract in place?

 

[jklcpa]

2 hours ago, DANRVAN said:

Thanks for pointing that out, so it appears legal ownership did not pass to the buyer.  And there is still an installment contract in place?

 

My unresearched opinion is that the installment note is still in place. Taxman said all terms are the same, funds were held in escrow and returned to purchaser with nothing actually touching taxpayer's bank accounts. Seems to me, all that really happened was to remove wife's name and rewrite deed of trust transferring the note and its security interest to the husband. 

I don't see how this turns into any sort of straightout promissory note where remaining gain is recognized no matter what the attorney says. He's not the one signing the return as preparer or taxpayer.  If that is truly the case, the attorney should provide the documentation and tax code sec research that shows how this is possible.  That's the CYA that I'd want in my file, because I'm the tax preparer, not a tax attorney.

[TAXMAN]

TP only holds note now. I really didn't mean to stir up a whole can of worms but it has been interesting. Yes attorney got a whole bunch of $.

[DANRVAN]

On 4/12/2022 at 3:35 PM, TAXMAN said:

Returns money back to tp and buyer. (same amounts). The terms and amounts of the first note never changed.

 

On 4/14/2022 at 6:44 PM, TAXMAN said:

TP and attorney have for tax purposes decided to treat it as paid off

 

On 4/14/2022 at 8:03 AM, TAXMAN said:

After discussion with elder tax attorney his thoughts. TP and spouse were paid off regardless of where $ came from

 

On 4/12/2022 at 3:35 PM, TAXMAN said:

. Attorney rewrites first deed of trust to TP only.

 

1 hour ago, TAXMAN said:

TP only holds note now.

How can he still receive payments if the contract was paid off?  Just because attorney decided it should be?  How can you convert an installment contract to a note and consider it paid off....and seller still holds a deed of trust?

 

1 hour ago, TAXMAN said:

Yes attorney got a whole bunch of $.

Forgive me if I am overlooking something here and jumping to conclusions;  but this guy sounds like a predator.

[Catherine]

11 hours ago, TAXMAN said:

Yes attorney got a whole bunch of $.

When do they not?!