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Old 03-08-2014, 09:26 PM
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Land contract question

I sold a rental house on land contract several years ago and last year (and probably the years after I sold it) I entered it on my schedule E and deducted depreciation and listed the principal payment and interest as all rent. Now I have no depreciation (it is all used up) and only have the principal payment and rent to record. I now know I should have used a form 6252 and form 4952. What should I do? I think I paid more taxes because I counted all the payments as rent instead of principal. Can I now start using the correct forms? Last year the income was about $5,000 and depreciation $1,000. Please advise. Thanks.



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Old 03-09-2014, 04:33 PM
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Originally Posted by Speedymdl View Post
I sold a rental house on land contract several years ago and last year (and probably the years after I sold it) I entered it on my schedule E and deducted depreciation and listed the principal payment and interest as all rent. Now I have no depreciation (it is all used up) and only have the principal payment and rent to record. I now know I should have used a form 6252 and form 4952. What should I do? I think I paid more taxes because I counted all the payments as rent instead of principal. Can I now start using the correct forms? Last year the income was about $5,000 and depreciation $1,000. Please advise. Thanks.
The legal title is not recorded or transferred until the buyer fulfills the contract’s obligations usually a few years from the Closing. However, your property is considered sold, in IRS rules, when a real estate contract is signed.as you have been treating this as a rental property. If so, you will pay tax on the depreciation recapture as sec 1250 gain taxed at 25% as ordinary income; all of the principalafter the sec 1250recap depre would be taxed at the long-term capital gains rate which, is 0%~ 15%. Any principal payments after the first principal would be tax-free. For example, if you sell a building for $1 million, for which you paid $800k and took $100k in depreciation, your adjbasis would be $700k. If the buyer on the contract gave you a $200k down payment, you would pay $25k in tax on the $100k of recaptured depreciation and $15k in tax on the $100k in capital gains as I assume that your tax bracket is higher than 15%.From the seller perspective, the capital gains would be recognized as an installment sale and would be recognized proportionally as the principal payments are received. As a seller, you cannot depreciate the property. You would report interest income on the mortgage payments received, and the mortgage payments you make would be deductible as investment interest on Sch E. It’s a great tax advantage to pay capital gain tax over the years through installment sale if you have a sizable gain.. I guess you need to File Form 1040X by the latest of:
3 years from the date you filed your original return for the year for which you made the contribution or 2 years from the date you paid the tax for the year for which you made the contribution. Please contact a CPA/an IRS EA in your local area for more accurate info in detail for your fed/state returns.



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Old 03-12-2014, 11:18 PM
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Originally Posted by Wnhough View Post
The legal title is not recorded or transferred until the buyer fulfills the contract’s obligations usually a few years from the Closing. However, your property is considered sold, in IRS rules, when a real estate contract is signed.as you have been treating this as a rental property. If so, you will pay tax on the depreciation recapture as sec 1250 gain taxed at 25% as ordinary income; all of the principalafter the sec 1250recap depre would be taxed at the long-term capital gains rate which, is 0%~ 15%. Any principal payments after the first principal would be tax-free. For example, if you sell a building for $1 million, for which you paid $800k and took $100k in depreciation, your adjbasis would be $700k. If the buyer on the contract gave you a $200k down payment, you would pay $25k in tax on the $100k of recaptured depreciation and $15k in tax on the $100k in capital gains as I assume that your tax bracket is higher than 15%.From the seller perspective, the capital gains would be recognized as an installment sale and would be recognized proportionally as the principal payments are received. As a seller, you cannot depreciate the property. You would report interest income on the mortgage payments received, and the mortgage payments you make would be deductible as investment interest on Sch E. It’s a great tax advantage to pay capital gain tax over the years through installment sale if you have a sizable gain.. I guess you need to File Form 1040X by the latest of:
3 years from the date you filed your original return for the year for which you made the contribution or 2 years from the date you paid the tax for the year for which you made the contribution. Please contact a CPA/an IRS EA in your local area for more accurate info in detail for your fed/state returns.
Thanks Wnhough for your answer. I am hoping I do not have to do a 1040x. Let me add a few things and see if this makes any difference. This is my Dad's property and I am doing his taxes but I am going by what he has told me and last year he told me to enter all the money he recieved for interest and principal as rent which I did. He took a little depreciation for repairs but now it is used up. He bought the house cheap and did major repairs and now there is no depreciation left to take. Now for 2013 he has recived $6600.00 which $2310 is interest and $4290 is principal. He is in the lowest tax bracket 10 or 15%.Could he just list the $6600 as rent. I think if he did he would still not owe much tax. He says let them audit him and they will find that he does not owe the IRS any more tax. He is 82 years old and this is pretty much his only investment income. Would you advise on what I should do concerning my Dad? And what penalties are there if he does not fill out the correct forms but still owes no more tax than what he paid?

Sincere Thanks,
speedymdl



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Old 03-13-2014, 02:21 AM
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Originally Posted by Speedymdl View Post



#1;This is my Dad's property and I am doing his taxes but I am going by what he has told me and last year he told me to enter all the money he recieved for interest and principal as rent which I did. He took a little depreciation for repairs but now it is used up. He bought the house cheap and did major repairs and now there is no depreciation left to take. Now for 2013 he has recived $6600.00 which $2310 is interest and $4290 is principal. He is in the lowest tax bracket 10 or 15%.Could he just list the $6600 as rent. I think if he did he would still not owe much tax. He says let them audit him and they will find that he does not owe the IRS any more tax. He is 82 years old and this is pretty much his only investment income. Would you advise on what I should do concerning my Dad?


#2;And what penalties are there if he does not fill out the correct forms but still owes no more tax than what he paid?

Sincere Thanks,
speedymdl
#1;I guess the int income of $2310 is subject to sec 1250 gain taxed at 25% as said previously as ord income as you need to recap the sec 1250 depre as you have gain on the sale of the rental pty. However, the principal of $4290 is subject to ltcg rate 0% in this case as his tax bracket is lower than 25%. From your perspective, the capital gains would be recognized as an installment sale and would be recognized proportionally as the principal payments are received. i guess you need to contact a CPA/an IRS EA in your local area for more accurate info in detail on the specific situation for your fed/state returns.

#2;unless he owes more tax than what he paid, no penalties imposed ;however, he’d be advised to file appropriate forms. In general the irs initially keeps any incomplete /incorrect tax paperwork. It uses the documents to perform an audit and allows the filer to fix the mistakes through additional paperwork. The amount of time the IRS keeps the tax records depends on exactly what is wrong with the forms, but after the statute of limitations has run out and additional taxes, credits or refunds cannot be assigned, it disposes of the records according to formal organizational procedures.i guess ou may also contact the IRS for more accurate info



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Old 03-13-2014, 02:23 AM
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Originally Posted by Speedymdl View Post
Thanks Wnhough for your answer. I am hoping I do not have to do a 1040x. Let me add a few things and see if this makes any difference. This is my Dad's property and I am doing his taxes but I am going by what he has told me and last year he told me to enter all the money he recieved for interest and principal as rent which I did. He took a little depreciation for repairs but now it is used up. He bought the house cheap and did major repairs and now there is no depreciation left to take. Now for 2013 he has recived $6600.00 which $2310 is interest and $4290 is principal. He is in the lowest tax bracket 10 or 15%.Could he just list the $6600 as rent. I think if he did he would still not owe much tax. He says let them audit him and they will find that he does not owe the IRS any more tax. He is 82 years old and this is pretty much his only investment income. Would you advise on what I should do concerning my Dad? And what penalties are there if he does not fill out the correct forms but still owes no more tax than what he paid?

Sincere Thanks,
speedymdl
as you can see, it is very complex to explain installment sale situation very accurately in my opinion. so you need soem professinla help for sure/accuracy.



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