inherited installment contract

[Ranger]

Client inherited an installment sale contract for a rental house. I can not find any information on how to report this.

Do you go back to the original date of sale or date of death for basis?

Another question. This was a do it yourself contract: $60,000 sale price, no down payment, $500 month for 10 years, no mention of interest. I am not sure how the imputed interest calculation works. Assuming an interest rate at 6% I ran an amortization schedue and came up with a beginning principal balance of about $45,000. So the sale price should be adusted to that amount?

Thanks for any comments you might have.

[Maribeth]

Client inherited an installment sale contract for a rental house. I can not find any information on how to report this.

Do you go back to the original date of sale or date of death for basis?

Another question. This was a do it yourself contract: $60,000 sale price, no down payment, $500 month for 10 years, no mention of interest. I am not sure how the imputed interest calculation works. Assuming an interest rate at 6% I ran an amortization schedue and came up with a beginning principal balance of about $45,000. So the sale price should be adusted to that amount?

Thanks for any comments you might have.

Your client "steps into the shoes" of the decedent. You need to find out how the decedent was reporting the sale and you continue to report it the same way until it is paid in full.

Maribeth

[Ranger]

Your client "steps into the shoes" of the decedent. You need to find out how the decedent was reporting the sale and you continue to report it the same way until it is paid in full.

Maribeth

Thanks for the reply Meribeth. I thought the "step in the shoe's" method was right but could not find a reference. (Do you have one?)

[DANRVAN]

I beleive you can find a reference in section 691.

In regards to the imputed interest, you can look up the AFR for the year and month of sale.

[jainen]

>>Do you go back to the original date of sale or date of death for basis? <<

There are two things. Collecting the monthly payment is presumably taxed as it was or should have been to the decedent. Conceivably the seller elected out of installment treatment so only the deemed interest is now taxable. More likely you will need to determine the ratio for capital gain as well. (Even though it was inherited, it will only be long-term if it was already long-term to the decedent.) If it was not being reported, the executor and heirs are personally liable for the unpaid tax to the extent of distributions.

The contract itself is a capital asset. The heir could sell the contract rather than hold it for the monthly payments. Basis is determined on date of death, presumably using time value of money for the balance owing and term, then adjusted for payments received later.

[Gail in Virginia]

>>Do you go back to the original date of sale or date of death for basis? <<

The contract itself is a capital asset. The heir could sell the contract rather than hold it for the monthly payments. Basis is determined on date of death, presumably using time value of money for the balance owing and term, then adjusted for payments received later.

According to IRS Publication 537, "Transfer due to death. The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Any unreported gain from the installment obligation is not treated as gross income to the decedent. No income is reported on the decedent's return due to the transfer. Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments.

However, if an installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. The estate must figure its gain or loss on the disposition. If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. "

This would support Maribeth's statement that the "client 'steps into the shoes' of the decedent."

[taxxcpa]

Thanks for the reply Meribeth. I thought the "step in the shoe's" method was right but could not find a reference. (Do you have one?)

I ASKED THE SAME QUESTION IN tHE tAX bOOK FORUM. HERE IS THE ANSWER I GOT

See if this helps, from Pub. 559 page 9 and 16.

Installment obligations. If the decedent had

sold property using the installment method and

you collect payments on an installment oblige-

tion you acquired from the decedent, use the

same gross profit percentage the decedent used

to figure the part of each payment that repre-

sents profit. Include in your income the same

profit the decedent would have included had

death not occurred. For more information, see

Publication 537, Installment Sales

.

If you dispose of an installment obligation

acquired from a decedent (other than by transfer

to the obligor), the rules explained in Publication

537 for figuring gain or loss on the disposition

apply to you.

Installment obligations. If an installment ob-

ligation owned by the decedent is transferred by

the estate to the obligor (buyer or person obli-

gated to pay) or is canceled at death, include the

income from that event in the gross income of

the estate. See Installment obligations under

Income in Respect of a Decedent, earlier. See

Publication 537 for information about installment

sales.