Installment Sale: Opting out of Opting out

[Joel]

Client sold property in 2007 as an installment sale and opted out of reporting the gain on 6252 and reported all of the gain in 2007 (figured the tax rates after January 20, 2009 may well be higher than present).

It appears that the buyer is going to default and seller will have to repossess the property.

IRS will only allow opting out of the opting out with their prior approval.

Has anyone had any success in asking for this approval?

If so, any suggestions as to the procedure to follow?

[BulldogTom]

Never had that issue. But I love your tag line on your signature. Are you a former Coastie?

Tom

Lodi, CA

Former Boatswains Mate 2nd Class, Bodega Bay, CA

[Joel]

Tom,

Yes 1951-1959

[jainen]

>>seller will have to repossess the property<<

Not that I want to shoot anyone down or anything, and I think your wording and phrasing are quite excellent and all, but why exactly does he want to switch to installment reporting if he knows he has to repossess the property anyway?

Well, I suppose he has his good reasons. Pony up the $11,000 user fee for a private letter ruling.

[Joel]

Jainen,

Since the sale was for raw land, it is possible that, if he did repossess it, a new sale might be immediately available because of the present economy.

Thanks for the info on the private letter ruling.

[jainen]

>>a new sale might be immediately available<<

It seems to me the net result is about the same. He takes back the property with a basis adjustment for the gain already reported and any costs of repossession. If he sells it again, that's a separate transaction with additional gain or loss.

[Joel]

Jainen

The taxpayers real concern is that he is paying capital gains tax on $400,000 gain now on property that he will still own.

[jainen]

>>he is paying capital gains tax on $400,000 gain<<

Sure he is. That was his plan from the beginning. He himself chose to set it up that way. That money is gone, regardless of what happens to the property now. A prudent investor looks forward, instead of getting hung up on might-have-beens.

He knew the risk of the promissory note secured by the property, and used that knowledge in negotiating an interest rate. He knew the market conditions, and used that knowledge in negotiating the price and terms of sale. He also knew the tax ramifications of it all, and used that knowledge in electing out of the protections offered by the tax code.

Real estate transactions sometimes fall through. That risk is part of the reason Congress gives tax breaks for real estate investment. If he has a cash flow problem, he can use the traditional investment technique of cutting his price and taking a tax loss. He'll still make lots of money on the deal.