Will capital gains be triggered in an ongoing installment sale if the buyer now wants to transfer that encumbrance to another property he owns?

[mbekken]

The buyer has been paying his mortgage on the installment sale for 2+ years but wants to get a construction loan for the property. The lender will not take a subordinate position, so the buyer wants to transfer the current indebtedness to his personal property. Will that trigger capital gains on the gain portion of the installment balance or will gains continue to be reported as principal is paid.

[TomYoung · Accepted solution]

The criteria for using the installment sales technique to report a sale are:

1. You have a gain on the sale
2. You are being paid in installments that extend past the year of sale

There's no requirement that the note receivable even be secured by the property in the first place, from the standpoint of being allowed to use the installment method.  The fact that your secured note receivable will now be secured by another property is irrelevant.

Tom Young

[Anonymous]

you may want to talk to a lawyer before you do this.  you may end up getting burnt, if buyer defaults.