Tax Year Prior to 2020: I sold rental property to family member with an installment loan Is thi allowed

[IreneS]

Generally, no -  The IRS says in  Pub. 537 - Installment Sales:

If you sell depreciable property to certain related persons, you generally can’t report the sale using the installment method. Instead, all payments to be received are considered received in the year of sale.

HOWEVER,  there is an exception to this rule:

You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. You must show to the satisfaction of the IRS that avoidance of federal income tax wasn’t one of the principal purposes of the sale.

 There is also a special rule if your relative sells, exchanges, or gives away the property.  For more information on this see page 7 of Pub. 537 - Installment Sales

You can report the proceeds from an installment sale by following these steps:

1.  Click on Federal > Wages & Income
2. Scroll down to the Less Common Income section and click on the Start/Revisit box next to Installment Sales. On the Installment Sales screen click on the Yes box.
3. Continue through the interview, entering the requested information.

[Drindin]

Hi,

Does anyone know how IRS defines - "no significant tax deferal benefit can be derived from the sale". How does IRS expect to prove that "avoidance of federal income tax wasn’t one of the principal purposes of the sale".

Thank you

[KarenL]

@Drindin Unfortunately, this is probably more a question for a tax attorney based on individual situations.

[Critter]

Ok ... there are 2 separate factors here : 

1) can you sell the home and receive the payment in installments that include interest ?  YES YOU CAN BUT ...

2) can you report the sale on the tax return on the form 6252 for installment sales ?  MOST LIKELY NOT... SEE THE RULES ABOVE. 

[Drindin]

Seems that the restrictions is limitted to sale of depreciable property to controlled entity, not between two humans - relatives (mom and son for example). 

"Generally, if you sell depreciable property to a related person (as defined in section 453(g)(3)), you can’t report the sale using the installment method"

This is from the the form instructions at the back: https://www.irs.gov/pub/irs-pdf/f6252.pdf

Following 453(g)(3)) in https://www.law.cornell.edu/uscode/text/26/453 we get:

"(3)Related persons For purposes of this subsection, the term “related persons” has the meaning given to such term by section 1239(b), except that such term shall include 2 or more partnerships having a relationship to each other described in section 707(b)(1)(B)."

https://www.law.cornell.edu/uscode/text/26/1239

1239(b) seems to say:

"(b)Related persons For purposes of subsection (a), the term “related persons” means—

(1) a person and all entities which are controlled entities with respect to such person,

(2) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary’s interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and

(3)except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.

 "

Here is some more on that topic:

https://www.wipfli.com/insights/blogs/taxthink/110727-tax-consequences

"Important Planning: It is important to note that sales of depreciable property at a gain between individua

ls are not covered by this rule. The related party rules apply to sales involving related business entities."

"Actually after looking at https://www.irs.gov/pub/irs-pdf/p537.pdf quoted above I found that the definitions of related person for this rule needs to include an entity as specified above .:

"Sale of Depreciable Property
If you sell depreciable property to certain related persons, you generally can’t report the sale
using the installment method. Instead, all payments to be received are considered received
in the year of sale. However, see Exception below. Depreciable property for this rule is any
property the purchaser can depreciate.
Payments to be received include the total of
all noncontingent payments and the FMV of any
payments contingent as to amount.
In the case of contingent payments for
which the FMV can’t be reasonably determined,
your basis in the property is recovered proportionately. The purchaser can’t increase the basis of the property acquired in the sale before
the seller includes a like amount in income.
Exception. You can use the installment
method to report a sale of depreciable property
to a related person if no significant tax deferral
benefit will be derived from the sale. You must
show to the satisfaction of the IRS that avoidance of federal income tax wasn’t one of the
principal purposes of the sale.
Related person. Related persons include the
following.
• A person and all controlled entities with respect to that person.
• A taxpayer and any trust in which such taxpayer (or taxpayer’s spouse) is a beneficiary, unless that beneficiary's interest in
the trust is a remote contingent interest.
• Except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of
that estate.
• Two or more partnerships in which the
same person owns, directly or indirectly,
more than 50% of the capital interests or
the profits interests.
For information about which entities are controlled entities, see section 1239(c). "

Can someone pitch in whether this restriction applies to individual family members - son selling directly to mother, no entities involved. This is fairly straighforward case.  I am making this a product question, since it seems to me that TurboTax does not differentiate the above definition of related persons limitted to one of the parties being an entity from other definitions of related persons within the legislation and listed as well in the instructions of form 6252. In other words there are two different definitions of related party/person one them is used only for the restrictions for an asset that can be depreciated, the other definition is valid for the resale of the property within two years of the initial pruchase.