I came across this exchange between an attorney and an IRS agent recently. I had to read it 10 times to really understand what they are talking about, but I am not a tax attorney. That's my excuse, anyway.
Q: Under a land contract, you hold the property, but there's still rights that are transferred to the buyer or the person who is paying the payments. They have to default before they lose their interest. There is a bunch of rights, and the same thing's true with the mortgage. In any event, my question is if there were an installment - and I know you don't believe the facts fit an installment contract - but if there were an installment sale, is it true that a taxpayer can say until I get payments to the level of my basis, I don't necessarily have to report this, because I haven't made any gain on it yet?
A: No. Actually, with an installment sale you would figure out based on the terms of the contract - let's say the contract says I made $100,000 profit on this transaction. I bought the property for 250. I sold it for 350. Even under the terms that this is an installment sale, okay, I receive the money - and there are special forms to report installment sales. That you would have to report the receipt of the first installment and compute if I made - if there is 40% gross profit based on the overall sales price, the 40% of that $100,000 I received goes toward - is considered profit for that year. Then in each subsequent year chances are you are going to be receiving interested on the outstanding balance. That's going to be reported annually as interest. And as each additional installment payment comes in, you are going to use tht same ratio. Same 40% ratio. If you get $10,000 a year for the next 10 years, 40% of that 10,000 is capital gains, 60% is return on the capital. So in an installment sale situation, you don't wait until the end. You report it in increments over the life of the installment contract.
Q: So, even though you haven't gotten your basis back, you still have to pay taxes on some percentage of what you get?
A: Exactly.
Folks, this is just one page of nine days of trial. I think my brain is melting.
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It's written in Swahili. I think that's your problem.
Hmm... do you think that could all be summmed up into one cohesive, understaandble sentence?
Well, no. I don't think lawyers have the capacity to sum up anything in one cohesive understandable sentence.
Here, I'll summarize for you (quoting Reno, who left this message at Grandma's Attic):
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I'm having flashbacks to Professor Terry's taxation class. Oh, the humanity . . . Why? Why?
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