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Financial Planning / Tax Strategies


Subject:  Re: Simple question? Date:  5/30/2003  12:28 PM
Author:  AlyKat Number:  65590 of 127753

of this is fine with me but my question has to do with the details of the offer, such as the 'breakdown' of the installments, ie; principal and interest. Should it matter to me (tax wise) how the payments are disclosed? I will be getting the same amount regardless so I am confused as to what difference it makes. I 'assume' my income tax liability will be the same, correct?

The interest is all ordinary income and then a portion of each payment is considered "gain"(assuming you have appreciation). Here's an example.

I sell a capital asset for $150,000 (with a basis of $30,000) on installment to receive payments yearly. I receive $50,000 on the date of sale and then charge 5% interest/year. I have a gain of $120,000 which is 80% of $150,000. Therefore, 80% of the principle portion of the payment is taxed as gain and 20% is considered return of capital. All of the interest ($5,000 on the first payment) would be ordinary income.

You should talk to an accountant, though, as if there is any depreciation recapture it must also be recognized in year 1.

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