My two brothers and I are designated as the pay on death recipients of a promissory note for the sale of our parents' farm. Last parent passed away in 2021 and the next installment payment (our first) will be coming due. The borrower has suggested paying the note in full, which we are agreeable to, however we are not clear on the tax implications. A non-probate transfer for this note was filed at the time of the sale and there will also be no estate.
First, is the principal payment taxable to us? From what I have read, proceeds from the sale of a home after a parent's death is only taxable for the portion the value appreciates between date of death and the sale of the property. The value of the note has not increased in value since the date of death since the note will be paid prior to the next interest accrual date. Does the same logic of no appreciation in value apply?
Or, if the principal payment IS taxable to us, is it as a Capital Gain and taxed at the same Gross Profit Percentage as shown on our parent's Form 6252 Installment Sale Income last year?
