Is this an installment sale?

The previous post said that you can elect to have your entire gain taxed at once at the beginning even if you are receiving installments. Suppose we are talking about an intangible. If you did that, you'd pay lots of tax at the federal and state level. Upon moving to another state B many years later while still receiving payments, you would be taxed on amounts received while a resident of B, but you won't get any tax from the original state A, nor will you be able to tax a tax credit for tax paid to state A because that was many years earlier. This seems a bit strange.

So if you sell IL property on installment and move to CA, you won't owe CA tax on the installment sales?

In my case its the purchaser's problem if the award exceeds the value of the trust.

I don't think it works like that.

Upon the sale, you pay tax on the full gain, to A and the Federal government. At that point, the principal is yours (as far as taxes are concerned). If the tax rate increases, that doesn't affect the already-taxed money. Each year, you do pay income tax on the interest received.

Several years later, you move to B. You get a check for, say, $1.2 million, of which $1 million is principal and $200K interest. You would report the interest to B, and pay tax on it. The principal is just return of _your_ already-taxed money, so it isn't taxable.

Seth

I'm sorry, I didn't come back to see this at the time, so didn't respond to your questions.

On the first point, generally if you elected out of installment treatment for federal and state income tax purposes at the time of the transaction, there would be no gain to recognize when the payment was received. Most states will follow the federal income tax treatment, so if you were a resident of another state when you got the payment, that state generally would not tax it. In fact, it wouldn't even know about it, because the payment wouldn't be reported for federal income tax purposes in the year of collection, and the calculation of state taxable income generally starts with federal taxable income.

You could get caught in a crossfire if you elected out of installment treatment for state but not for federal purposes (as you can do in some states, including California). Then when you moved to state X and collected the payment, the gain would be included in your federal taxable income and probably in state X taxable income as well. The fact that you paid state tax on the entire gain in the year of sale likely would cut no ice with the new state of residence. However, that state might allow you credit for the tax you paid to the former state in the year of sale. Some states allow credit for taxes paid to other states only in the same year, but others (including, now, California) will allow credit for taxes paid to the other state in a prior year.

On the second question, before 2002 the answer would have been yes -- if you had sold property on an installment sale in IL and then moved to CA, CA would not have taxed the gain element of the payments (although it would have taxed the interest accrued after you became a CA resident). Due to a law change, today CA would tax the gain, and so would IL, because the gain is IL source income. CA would allow you credit for the tax you paid to IL on that income.

Katie in San Diego