Installment sale without interest

[Kea]

Client called today to say he sold land to a friend for $113K (FMV) with $25K down and $500 / month until balance paid. There is no interest included in the agreement. Since there is no interest it isn't an installment sale. I think this means I show the whole $113K as the selling price, and it all gets included in the year sold (2007). Is that right?

My client bought the land 3 years ago with plans to build a house on it. He cleared the land and installed utilities but never built the house. I know I can include the utilities in the cost basis, but can I count clearing the land? The buyer of the land wants to build a house, so I would think that clearing the land would count as an improvement.

Thanks.

[Julie]

I think you need to do some research on "imputed interest." I don't remember all the details, but some of the purchase price will be construed as interest income.

[Jake]

Julie is right. You should still report this as an installment sale. However, part of each payment needs to be allocated to interest. What I typically do when a client is recieving income from an installment sale with unstated or inadequate interest is to prepare an amortization schedule using the applicable federal rate (AFR) for the month of the contract. (The AFR can be found on the IRS website) Report the interest component on sch B and the rest on sch D.

[Kea]

Thanks Julie and Jake. I like that better than reporting the whole gain in '07.

[kcjenkins]

And yes, you can include the cost of the clearing in his basis.

[TAXBILLY]

AFR Info from IRS:

http://www.irs.gov/taxpros/lists/0,,id=98042,00.html

taxbilly