Originally Posted by MFinMO
#1;My family has a C Corp that is a partner in a LLC that owns farm ground. If the LLC were to sell the farm ground with seller financing, how is that taxed? For example purposes, let's assume the property is sold for $300,000 with 20% down & financed at 7% (5 year balloon on 20 year amortization schedule). It has a cost basis of $100,000 and debt of $50,000.
#2;Do we pay capital gains on the total sales price less basis up front when we sign the deal, or as we receive the money?
#3;And I'm assuming the interest income will be taxed at each partners regular income tax rate?
#1;If the sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method.;in general for both the buyer and seller of a partnership interest may find it beneficial to structure the sale and purchase transaction as an installment sale in which theLLC holds the note. ; The rules for installment sales do not apply if you elect not to use the installment method .An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. this allows the purchase price to be paid over time rather than in a lump sum, perhaps with distributions of partnership profits. In addition, the buyer gets a cost basis equal to 100% of the purchase price at the time of the purchase as an installment sale does not delay the creation of basis until installment payments are made. From the LLC’s perspective, an installment sale can provide a steady income stream over a period of 20 years and may allow the
LLC to defer the income tax liability resulting from the sale other than the tax attributable to the sale of Code Sec. 751 property.Calculating theLLC’s gross profit, total contract price, gross profit reporting ratio, and yearly payments is based on the same principles that apply to sales of other personal property ;a LLC interest is personal property. In addition, the selling partner's share of LLC liabilities is taken into account as part of the total contract price and as year-ofsalepayments only to the extent they exceed the selling partner's basis in his partnership interest. I guess for more accurate info you need to contact a CPA/an IRS EA in your local area for your fed/state returns
#2;as mentioned above; you need to use Form 6252 to report the sale of the pty on the installment method. Also, if you sold property to a related person, you may have to file the form each year until the installment debt is paid off, whether or not you receive a payment in that year.
#3;correct; Each payment on an installment sale usually consists of the following three parts; Interest income; Return of the LLC’s adjusted basis in the property; capitalgain on the sale. You must report interest as ordinary income. Interest is generally not included in a down payment. However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Interest provided in the agreement is called stated interest. If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount,depednding on the amount of the interest s you can see.