Wednesday, December 6, 2006

Installment sale to split income between years

Dec 6,2006

Seller of $400,000 property with basis of $ 100,000 A Seller has a buyer for willing to pay him $400,000 on December 15, 2006. Seller would like to split this into two checks: one for $200,000 on December 15, 2006, and another for $200,000 on January 15, 2007. This keeps the seller OUT of the Alternate Minimum Tax for both years, and saves some $5,000 over the course of the transactions.

Can he do this without the IRS claiming there was no economic substance in splitting the sale other than tax avoidance?
My opinion: He could structure it as an installment sale with the two installments as described. To avoid any question about imputed interest being omitted, he should charge the going rate. If the goal is to keep the amount at exactly $ 400,000, assuming an interest rate of 6% per annum, here is the calculation and resulting adjustment to the second installment:

One month’s interest = .06 divided by 12 or .005 (1+.005=1.005)
$ 200,000 divided by 1.005 = $ 199,004.97
One month’s interest .005 X 199,004.97 = 995.02
199004.97 + 995.02 = 199,999.99 (one cent rounding variance from $ 200,000)

This is not to be considered a recommendation or tax advice. Any transaction of this type should be coordinated with your tax advisor and the attorney who would draw the contract.

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