J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

5.24 Restriction on Installment Sales to Relatives

The installment sale method is not allowed where you sell depreciable property to a controlled business, or to a trust in which you or your spouse is a beneficiary. All payments to be received over the installment period are considered received in the year of sale.

Further, if you sell property to a relative on the installment basis, and the relative later resells the property, you could lose the benefit of installment reporting. Generally, you are taxed on your relative’s sale if it is within two years of the original sale.

- - - - - - - - - -

Caution

Installment Sale to Relative

If you sell property on the installment basis to a relative who later resells the property, you could lose the benefit of installment reporting.

- - - - - - - - - -

EXAMPLE

In 2012, Jones sells land to his son for $250,000, realizing a profit of $100,000. The son agrees to pay in five annual installments of $50,000 plus interest, starting in 2013. Later in 2012, the son sells the land to a third party for $260,000. Jones Sr. reports his profit of $100,000 in 2012, even though he received no payment that year. Payments other than interest received by Jones Sr. after 2012 are tax free because he reported the entire profit in 2012.

Two-year resale rule for property.

If you make an installment sale of property to a related party, you are taxed ...