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Installment Sale/Gift

Father wants to transfer ownership of his corporation to his children.
To avoid gift tax it will be a purchase for fair market value, on an
installment sale with payments due that are under the gift tax
exemption amount. Payments are contemplated to be forgiven, but
taxable income will be recognized on forgiven interest.
My question is whether the father will have to recognize taxable
capital gain when he forgives the installments?
Thanks for any insight you have.
Reply to
Stuart O. Bronstein
Gee Stuart, if one could avoid reporting capital gain by merely selling everything on the installment plan then we would not have any capital gain income. Of course, the gain must be reported.
Reply to
Alan
Thanks Alan. My question was more about the gift part - whether making a gift of a capital asset with a capital gain, is taxable. That was something that I probably should have known, but never had it come up in practice.
Reply to
Stuart O. Bronstein
Let me rephrase that. Cancellation of debt is not taxable if it was done as a gift. Since the donor actually receives no money because of the gift, does he have to recognize the capital gain he would have otherwise received? It makes sense that he would because the donee is getting a basis higher than the donor's basis. But I didn't now for certain.
Reply to
Stuart O. Bronstein
I will assume the original transaction was a bona fide sale that meets all the installment sales conditions. In this case, it seems that the seller/donor is not making annual gifts of a capital asset. The annual gifts look strictly financial - the equivalent of giving cash to the recipient who then immediately makes the annual installment payment. I don't see how the seller avoids responsibility for the associated capital gains.
If the donor is going thru the effort of re-valuing the business every year and then giving a proportion of the business equivalent to the gift limit to the kids, this looks like giving an appreciated asset to somebody. In this case the recipient inherits the donor's cost basis and the donor avoids the capital gains.
Nothing authoritative here. Just my 2 cents worth.
Reply to
BignTall
BignTall wrote :
Thanks. That was my initial thought, too. But I wasn't able to find any authority on it one way or the other.
That was a suggestion I had for them also - it avoids the capital gain issue, and also the recognition of interest issue of an installment sale. But if they want the kids to have it all now, there aren't a whole lot of options.
Reply to
Stuart O. Bronstein
You don't state the value of the corporation, but why not gift the entire value now, file the appropriate gift tax returns and use up some/all of the lifetime gift/estate tax exclusion?
Ira Smilovitz, EA
Reply to
ira smilovitz
If the objective is for the kids to get the business now, Ira Smilovitz's suggestion of gifting the entire business and filing a gift tax return is something to check out. Concerns that a huge gift could cause major estate tax issues if the donor dies after 2025 were reduced this week when the IRS issued regulations on how it will deal with the reduction in the Basic Exclusion Amount that current law has scheduled for January 1, 2026. See:
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Reply to
BignTall
In article , >> If the objective is for the kids to get the business now, Ira >> Smilovitz's suggestion of gifting the entire business and filing a gift >> tax return is something to check out. Concerns that a huge gift could >> cause major estate tax issues if the donor dies after 2025 were reduced >> this week when the IRS issued regulations on how it will deal with the >> reduction in the Basic Exclusion Amount that current law has scheduled >> for January 1, 2026. See: >>
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> >What happens should the law be changed to expressly include a clawback? Then the estate would owe more tax. If you're worried about that, one way to mitigate the risk is to buy life insurance to provide cash for the estate to pay the tax.
Reply to
John Levine
I saw a recent IRS notification (i.e. not some 3rd party article) that addressed this issue. It stated that a gift against lifetime exclusion in 2019 would not be subject to clawback even if the law changed and the amount were adjusted in a future year to a lower number. Of course, now you just heard this from a semi-anon internet friend. But, a good thing to look for. If I see it first, Ill be happy to post the link.
HA! this is it -
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I may have conflated this with something else, but this addresses the potential future change after 2025. Either way, it's something
Reply to
JoeTaxpayer

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