I am currently part owner of a commercial property and have received an offer from one of my partners to purchase my share. The offer consists of some cash up front, with the remainder to be paid in installments over a period of years. All 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?

Thanks,
arahfool

I 'assume' my income tax liability will be the same, correct?

Hope I understand this correctly.

The interest will be ordinary income. While the portion of the gain attributed to appreciation is long term capital gains.

You should meet with your accountant to explain pertinent options.

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.

aly

Thanks for the replies and the example. With that I am able to do the rough calculations I need to better understand my situation.

arahfool

make sure you get a security interest (mortgage) in the underlying asset to protect yourself.

- Bill