Installment sale of rental property-reporting tax/insurance reimbursements

[jeffreyd]

In Aug. 2021 we did a land contract installment sale of a property that was rental until that closing. We have reported rental income and expenses through the years. At August closing of installment sale, the buyer reimbursed us prorated positions for taxes (paid & claimed in 2020) and insurance (paid in 2021) that were previously paid by us.  Where/how do we report those reimbursement amounts that were associated with the closing on the installment (land contract) sale?

[ColeenD3]

Since the 2021 reimbursement was for insurance, you can reduce your insurance expense on Schedule E. 

You will have to reduce the basis of the property with the 2020 tax reimbursement.

[jeffreyd]

I made an error in describing our situation. The insurance for 2021 was paid in 2020. In 2021, the insurance company issued us a check, refunding the prorated portion of the year after the sale. So, in effect, on our Schedule E, it's like our insurance "expense" was -($72.00). So do we actually put a negative number on line 9?

[jeffreyd]

I'm not clear on HOW to follow your suggestion to "reduce the basis of the property with the 2020 tax reimbursement." We had already paid the taxes; we were being reimbursed at closing for the portion covering the dates from closing (in August)- through the end of the year.

[Carl]

The insurance for 2021 was paid in 2020. In 2021, the insurance company issued us a check, refunding the prorated portion of the year after the sale.

Simple really. It gets included as rental income for 2021.

"reduce the basis of the property with the 2020 tax reimbursement." We had already paid the taxes; we were being reimbursed at closing for the portion covering the dates from closing (in August)- through the end of the year.

Again, the simplest thing to do is to include it as rental income. If you go changing the cost basis on "any" asset, that will totally screw up the depreciation and the depreciation history. So don't go changing the cost basis of anything. Ever.

In the year you paid those taxes, the full amount paid in 2020 was 100% deductible on SCH E. Now that you're being paid back part of it in 2021, it's taxable. So just include it in the rental income for 2021 and you're good.

[jeffreyd]

That seems logical, but how about this: In the title company's closing settlement sheet we received, under "credits", there are these line items: Sale price of property; Prorations & Adjustments (which include: Taxes from closing date to end of year; sewer bill from closing date to end of year). So the total of the "Credit" column is the sum of those amounts. Shouldn't we just make that the selling price?

Again, all of these reimbursements precipitated out of the closing on the installment sale. It is counter-intuitive to me to account for them in our Rental income/expenses Schedule E. Please explain why that's the appropriate choice. (BTW, we never claimed any depreciation on the property; it was inherited just a few years ago.)

[Carl]

So the total of the "Credit" column is the sum of those amounts. Shouldn't we just make that the selling price?

Yes.

Please explain why that's the appropriate choice.

It's *A* choice. You asked a question, and provided one of many possible responses.

BTW, we never claimed any depreciation on the property; it was inherited just a few years ago.)

Did "you" rent out the property after you acquired ownership of it? If not, then no problem. If you did rent out the property, then you have a big problem. You are required by law to depreciate rental property starting from the time it's placed in service. If you did not, then "run" to a tax pro for help.