Category: Individuals; Real Estate, Nontaxable Exchanges
Subject: Residence, Sale of
Title: Interaction of Section 121 and Installment Sale, Post Mortem Collection
IRC Sections: 121, 453B(c), 691(a), 453(d)
Filename: 1162.html
Date Produced: 7/96

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

This is in response to your fax of May 17, 1996 regarding sale of a residence under an exclusion election pursuant to Section 121. As I understand it, the amount of gain to be excluded on the sale is less than $125,000. Accordingly, there is no net gain, after consideration of the exclusion. I further understand that your client (or her legal representative) plans to sell the home in exchange for an installment note. Some of the collections on the note may occur after your client's death.

You are concerned that any collections after your client's death may not be eligible for the gain exclusion under Section 121.

Comments
1. Revenue Ruling 80-249, 1980-2 CB 166, deals with the mechanics of how Section 121 interacts with the installment sale provisions. In effect, the amount of gain excluded under Section 121 is excluded from the gross profit calculation at the outset. For example, suppose a home is sold for $325,000, at a gain of $185,000, and Section 121 is elected. After the $125,000 exclusion, the net amount of gain to be reported is $60,000. For installment reporting purposes, the gross profit percentage is based on $60,000. Accordingly, as the $325,000 is collected, only 18.46% will be treated as gain.

2. Transmission of an installment obligation by reason of death is not a disposition of the installment obligation. Section 453B(c). Under Section 691(a), an installment obligation is an item of income in respect of a decedent. Accordingly, the recipient of an installment obligation previously held by a decedent "steps into the shoes" of the decedent with respect to installment reporting and treats subsequent collections on the installment note in the same manner as the decedent would have if the amounts been received by the decedent.

3. In this case, there is no gain in excess of the amount excludible under Section 121; accordingly, it is not 100% clear that the installment provisions are even available in this case.

Conclusions/Suggestions
1. It seems to me that one could view this situation in one of the following two ways.

A) The taxpayer has a zero-gross-profit-percentage installment sale. As such, when she dies, the estate or the heir would inherit the zero gross profit percentage under Rev. Rul. 80-249 and Section 691.

B) Installment reporting is not available at all. Accordingly, everything (the whole gain less the applicable exclusion) is reported in the year of sale thus making subsequent installment collections moot from an income tax standpoint.

2. Why not report the sale and take the position that installment reporting is available. Then, elect out of the installment provisions under Section 453(d). It would seem to me that this would absolutely force everything (the whole gain less the exclusion) into the year of sale and thereby render subsequent note collections a moot issue. Note, electing out of the installment provisions requires an affirmative election on a timely filed return. See Section 453(d) and the regulations thereunder. Also, the exclusion under Section 121 is also an affirmative election that must me made on a timely filed return.