Installment sale income

[cientax]

Have a client that bought a home (not her residence and not rental), fixed it up and sold it (flipped). She paid cash for the home in cash in april 2008 and sold it in May same year. She is carrying the note for 30 years. She needed some quick cash last year and sold 72 months of the note at a discount of about 60 percent. Prior to selling the 72 months she received 8 regular monthly installment payments from the buyers. We reported the sale on Form 6252 for the 2008 tax return. I guess my question is how do I report the sale of the 72 months. Do I report it as one installment payment and add it to the other eight payments she received? What about interest? Would this be a Sch-D transaction instead of an installment payment? Any help would be appreciated because at this time I am considering reporting it as an installment payment.

[jainen]

>>reporting it as an installment payment<<

Yes, according to Pub 537 the sale of an installment obligation is treated as a payment on principal with gain or loss calculated from the basis of the note. But for this sale of only part of the note, you now have a situation in which the original gross profit percentage may overstate the actual gain, both in 2009 and in the future. So perhaps this should be considered a reduction in sales price with the percentage recalculated. I think this requires additional research. It is not TOO weird or unusual, so I would guess some authoritative guidance is available somewhere.

Overall, the series of transactions is unusual enough to call for detail review of the documentation. I would want to make sure there are no issues of related parties, side agreements, below-market pricing, and so on.