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Installment Sale/New Client


Terry D EA

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New client came in with a few rental properties, normal W-2 and income stuff, and an installment sale of a property they were renting to the tenant. They also brought the previous return. I have found a few errors and don't know exactly what to do. So here goes

1. All rentals have been depreciated over a period of years. NO ^3@%^  depreciation schedules! The client has asked for them but hasn't gotten any good response. Only response so far is "the program calculates the depreciation and that is what is used every year" What, really? Based on the current depreciation figures, it looks as though the property acquisition cost including the land was the basis of the depreciation. This is a maybe and backing to the depreciation came relatively close. Yes, there are other possible depreciable improvements. My best guess is to use the figures from the 2017 return to back into the cost basis to continue the depreciation as is. This is for each property as well.

2. Installment sale. All gain from the profit percentage was put on form 4562. In my opinion and because it was rental property, the gain should have been reported on form 4797. Second problem, there is no worksheet showing the calculation for the profit percentage. I can't even begin to determine the basis at the time of the sale because again, no depreciation schedules. So, I have no choice but to use the profit percentage from 2017 correct?

3 Interest from the installment sale was not reported AT ALL on the 2017 return. This is like $3800.00. 

I did have the client sign an engagement letter that includes the language regarding not doing an independent review of their information with the return being prepared from the information they provided.; etc. Is this something that I should contact my E & O about? The previous preparer has gone out of business and is no longer preparing returns. My first response was to send them back to him/her. This return is good revenue but...….

Advice and insight please.

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And why would not the client have copies of all or several years worth of returns?  If he has 2017, ask for as many prior years as possible.  Even one or two more might be of help.  Does he have an amortization schedule for the installment sale?  Did you mean Form 6252 instead of 4562?  The percentage should be the same as established in year of sale and should show total of payments received in prior years.

I agree with cbslee, the client has some responsibility here, too, for record keeping even if he doesn't quite know where to put the numbers.  That's our job.

I hope you receive some big bucks to clean this up!

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22 hours ago, Margaret CPA in OH said:

And why would not the client have copies of all or several years worth of returns?  If he has 2017, ask for as many prior years as possible.  Even one or two more might be of help.  Does he have an amortization schedule for the installment sale?  Did you mean Form 6252 instead of 4562?  The percentage should be the same as established in year of sale and should show total of payments received in prior years.

I agree with cbslee, the client has some responsibility here, too, for record keeping even if he doesn't quite know where to put the numbers.  That's our job.

I hope you receive some big bucks to clean this up!

Margaret, it appears I was unclear. The profit recognized on the 6252 is to be directed either to Sch D or 4797. I don't know where the 4562 came from. Also this client trusted the previous preparer and didn't even know about any worksheets or depreciation schedules. As I said, the interest earned from the installment payments wasn't even put on the return for 2017. Duiring our meeting he had a copy of 2016 but I don't know about anything any farther back. Worth asking though.

Yes, I am aware the profit percentage stays the same each year. But with the way everything else is done, I question if this was calculated correctly as well.

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Terry, I guess it was just a typo in your number 2 paragraph.  In the installment sale with a current client, the profit percentage goes to 6252 line 4 as Sec. 1231 gain then flows to Sch D Part II line 11, so both. My client sold a commercial building.

I agree with cbslee first or DANRVAN at least.  Unless you have only this client to manage, you may not get any sleep trying to finish in 2 weeks.  Good luck!

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Just an update. The client brought me returns back to 2007. This was very helpful. I did find the depreciable basis of one property and the calculation of the profit percentage for the installment sale. Assuming the depreciation was correct when the profit percentage was calculated, it is correct. The last purchased rental depreciation was calculated without subtracting the land value. I retrieved the figures from the county site. Now, the bad, no interest on the installment sale reported any where in any year. The installment sale originated in 2015. I scoured those returns for the interest. Why, I don't know other than looking for the possibility of the numbers being placed somewhere else and not on line 8a from the previous form 1040. Each year line 8a is blank except for 2016 has 37.00 on that line.

So, 3115 it is and all the bad news to the client. The total interest NOT reported is approximately 8K. 2018 is 3900.00. Here is what I hate about this. First year this client comes to me and will have to pay dearly. I'm sure it makes him wonder if he should have came to me at all. I am going to ask the client what the previous preparer's background is. All return copies back to 2007 were not signed and has been completed using HRB online software. I have documented proof of my findings and printed the 6252 instructions to show him where the interest should have been reported. All I can do is advise him that he is responsible to file an accurate return and the 2015, 2016, & 2017 should amended to reflect the tax due. Yes, he will owe money for 2015.

No, this is not my only client, there are at least 15 returns waiting and most of them are rental properties with one that may need a gift tax return completed. Working long hours but have my mind made up that anything after the 9th goes on extension. Anything that has been dropped off and not completed by the 10th goes on extension. I have a few that are on hold for additional information. Those may hit the extension block as well. Oh yeah Margaret, our favorite CRUT it due any day and you know that is definitely getting an extension. 

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