Inherited promissory note for sale of land

[qdb003]

In 2019 I inherited from my grandmother 1/6 of a promissory note on the sale of land. I received the first two payments in 2020. Do I report only the interest on these payments?  If so, how?

[gloriah5200 · Accepted solution]

You and the other 5 beneficiaries will assume the ownership of the promissory note on the sale of the land. You will use the same gross profit % that she was using on her return (split by all 6 beneficiaries) and filed on your return the same way she was reporting it.

Per IRS Publication 559:

Installment obligations. If the decedent sold property using the installment method and you are collecting payments on an installment obligation acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Include in your income the same profit the decedent would have included had death not occurred. For more information, see Pub. 537, Installment Sales.

Please refer to the following link for additional information:
https://www.irs.gov/pub/irs-pdf/p559.pdf

IRS Publication 559

[qdb003]

Thank you for the IRS pub links. This is farm/ranch land she and my grandfather acquired many years ago (like 40-50 yrs), so I have no idea what the cost basis might be. How could I find out how the sales proceeds would have been filed for her (so that I can handle the same way)?

[gloriah5200]

You should get a copy of the last year return that she filed and see how it was reported on that return.  If she did sell the property at a loss and is only reporting the interest income each year, you would do the same on  your portion.  If she sold the property at a gain then you will find a Form 6252 in the return and you will need to use the same gross profit % on the Form 6252 in your return for any principal payments received in addition to reporting the interest income received as interest income.

If you know the original selling price and her original cost basis you can calculate the gross profit %, or you can copy it from her prior year return form 6252 so it is taxed the same way in you and your 5 siblings hands as it was in your grandmother's in the prior years.

Per Pub 537

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 isn’t a disposition. Any unreported gain from the installment obligation isn’t 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.