 Property
sale straddles two tax years
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 Dear
Tax Talk,
I bought a half-acre lot in 1998 and paid $39,000 for it. If I sell
it for $110,000 in December 2005, but don't receive any of the proceeds
until the next month (January 2006), and my gross income is $40,000,
married with no children, do I have an option of what year I have
to pay the capital gains in -- 2005 or 2006? What would be my capital
gains tax on this sale? Thanks.
-- John
 Dear
John,
I'm not clear why you're not receiving the
money until next year. I am assuming you're taking back some sort of promissory
note that will guarantee the payment in January.
Basically, when you sell property where you'll receive
a payment in a subsequent tax year, you have entered into an installment
sale for tax purposes. An installment sale allows you to report
the gross profit on the sale over the tax years you collect on the
note. Installment sales are reported on Form 6252. Since all of
the collection will occur in 2006, you obviously have to report
the gain in that year. However, since you closed on the property
in 2005, you can elect out of the installment-sale rules and report
the entire gain in 2005.
As married taxpayers
in 2005, you can expect to pay a little more than 10 percent tax on the $71,000
long-term capital gain in 2005 by electing out of the installment-sale rules.
If your income were to increase in 2006, your tax could go as high as 15 percent,
which is the maximum tax applicable to long-term capital gains.
You also never know what will happen next year with
taxes, so you might want to take an extension on your 2005 return
to see if capital gains rates will go up next year. If the rates
go up, you can elect out of the installment-sale rules on your 2005
tax return and capture the tax savings.
To make this election,
do not report your sale on Form 6252. Instead, report it on Schedule D (Form 1040).
You must make this election by the due date, including extensions, for filing
your tax return for the year the sale takes place.
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