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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
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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.
