 Deferring
gain in investment property
|  Dear
Tax Talk,
I own investment land ($690,000 fair market value
and $228,000 adjusted basis) that I am interested in selling. I have
many cash offers, but I want to avoid recognizing the entire gain
in the year that I sell the land. I am considering selling the land
to the Tyson Family Corp., for a 20-year debt obligation. The corporation
would then sell the land for cash. Would this strategy be effective
in deferring the gains? What tax principle would support such a transaction
if it is at all possible? -- Marlon Tyson
 Dear
Marlon,
Unfortunately, you're not the first to come up
with such a clever end run around the law, and that is why the loophole
you want to exploit is closed. What you're contemplating is an installment
sale to a related party. Under an installment sale, the seller reports
gain annually based on the amount of principal collected on the
debt and the percentage of gross profit from the sale.
For example, if you collected $35,000 in principal
annually on the debt and your gross profit is 67 percent ($462,000
in gain on $690,000 in selling price), you would report $23,450
in long-term capital gain annually plus the interest you receive.
Unfortunately, however, if you sell to a related party that later
sells the acquired property, your deferral ends.
Page six of Publication
537 provides a long list of who is considered a related party.
You can only continue to defer amounts if the related party did
not fully collect and only to the extent they did not collect. In
other words, their collections are your collections whether or not
they're paid to you.
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