imputed interest

[grandmabee]

is imputed interest mandatory? I have a Fishing vessel sold on installment sale and the contact said no interest. not related. Must i inpute interest?

[grandmabee]

is imputed interest mandatory? I have a Fishing vessel sold on installment sale and the contact said no interest. not related. Must i inpute interest?

I know I have to impute interest unless there is some odd exception. But my real question is I do the interest and claim less principal on the 6252 but what happens to the balance of the prinipal contract? I have contract for 30,000 get paid 30,000 over the years which 3,000 goes to interest and 27,000 goes on to the 6252. what about the balance of 3000 that should be reported on 6252? they are not going to get any more money

[Bart]

I know I have to impute interest unless there is some odd exception. But my real question is I do the interest and claim less principal on the 6252 but what happens to the balance of the prinipal contract? I have contract for 30,000 get paid 30,000 over the years which 3,000 goes to interest and 27,000 goes on to the 6252. what about the balance of 3000 that should be reported on 6252? they are not going to get any more money

You did not sell the boat for 30,000. You sold it for something less with the difference being interest. Like your example above, you actually sold the boat for 27,000 and when you collect 30,000 over the years you have recovered your sale price of 27,000 and collected 3,000 in interest.

[michaelmars]

What if it were sold for "0" percent financing, seems to be working for toyota?

[grandmabee]

yes how does that work. So I reported the sale wrong in the first year for sale price? only down payment last year near end of year. I reported the contract price and then this year I am working on the imputed interest.

are you saying I reported the wrong sale price because I did not use imputed interest

[Maribeth]

yes how does that work. So I reported the sale wrong in the first year for sale price? only down payment last year near end of year. I reported the contract price and then this year I am working on the imputed interest.

are you saying I reported the wrong sale price because I did not use imputed interest

There is no such thing as a non-interest bearing contract between two unrelated parties. If you did not take into account the implied interest in the contract when you set it up, then, yes, you reported the installment sale incorrectly in the original year.

The selling price was comprised of two parts: the principal balance and the imputed interest.

If this is only the second year, I would figure out what should have happened in the first year, determine what did happen in the second year, and adjust this year accordingly. You will find that others may advise that you amend the prior year but I would only amend the prior year is the difference in tax was a major factor on the return.

Maribeth

[Bart]

What if it were sold for "0" percent financing, seems to be working for toyota?

Toyota is selling inventory whereas this person is selling business property which has depreciation recapture, sec 1231 gain, interest or maybe something else.

[OldJack]

Well... imputed interest is at the Applicable Federal Rate (AFR) which is less than 1%. I'm not sure amending anything is going to change much of anything.

[OldJack]

Blended Annual Rates for Demand Loans

(Current through December 2009)

Under section 7872 of the Internal Revenue Code, there is interest imputed to "below market loans" between family members, employers and employees, corporations and shareholders, and in other situations. For a loan payable on demand, the short-term applicable federal rate would apply for the purpose of calculating any foregone interest, and because that rate can change monthly, the calculation of interest would have to be month-by-month, with monthly compounding of accrued interest.

To simplify calculations of interest for demand loans, I.R.C. section 7872( e )(2) allows the use of a "blended annual rate" for demand loans with a fixed principal amount outstanding for an entire calendar year. According to Rev. Rul. 86-17, 1986-1 C.B. 377, the blended annual rate is the product of ( a ) one half of the January semiannual short-term applicable federal rate times ( B ) one half of the July semiannual short-term applicable federal rate. This blended annual rate is published by the Internal Revenue Service in a Revenue Ruling every June, based on the relevant rates for January and July of that year.

The following is a chart of the blended annual rates from 1985 to the present. For the interest rates to apply to low-interest (or interest-free) demand loans before 1985, see Rev. Proc. 85-46, 1985-2 C.B. 507.

Blended Annual Rates

under Section 7872 Calendar Year Blended Annual Rate

1985 9.24%

1986 7.77%

1987 6.81%

1988 7.72%

1989 8.94%

1990 8.19%

1991 7.11%

1992 4.98%

1993 4.16%

1994 4.80%

1995 6.58%

1996 5.77%

1997 5.85%

1998 5.63%

1999 4.94%

2000 6.24%

2001 4.98%

2002 2.78%

2003 1.52%

2004 1.98%

2005 3.11%

2006 4.71%

2007 4.92%

2008 2.80%

2009 0.82%