Arkansas Administrative Code › Agency 006 - Department of Finance and Administration › Division 05 - Division of Revenues › Regulation 1997-4 - Comprehensive Individual Income Tax Regulations › Rule 26-51-404 - GROSS INCOME GENERALLY › Rule 2.26-51-404(a)(2) - Installment Sales - Real Estate

Current through Register Vol. 49, No. 6, June, 2024
Sales of real estate in which thirty per cent (30%) or less
					 of the sale price is received in the year the sale is consummated may be
					 reported on the installment basis. The vendor may report as income from such
					 transaction in any tax year that proportion of the installment payment actually
					 received in that tax year which the total profit realized, or to be realized
					 when the property is paid for, bears to the total contract price.
In the sale of mortgaged property the amount of the
					 mortgage, whether the property is merely taken subject to the mortgage or
					 whether the mortgage is assumed by the purchaser, shall be included as a part
					 of the selling price. However, the amount of the mortgage to the extent it does
					 not exceed the price to the vendor of the property sold, shall not be
					 considered as a part of the initial payments or of the total contract price in
					 determining the application of installment basis in the reporting of income.
					 Commissions and other selling expenses paid, or incurred by the vendor, are not
					 to be deducted or taken into account in determining the amount of the initial
					 payment, total contract price or selling price.
If for any reason the purchaser defaults in any of his
					 payments and the vendor, reporting income on the installment basis, repossesses
					 the property, the entire amount received in installment payments and reported
					 by the vendor less the sum of the profits previously reported as income and an
					 amount representing proper adjustment for exhaustion, wear and tear,
					 obsolescence, amortization and depletion of the property while in the hands of
					 the purchaser, will be income of the vendor for the tax year in which the
					 property is repossessed. The basis of the property in the hands of the vendor
					 will be the original basis at the time of the installment sale.
If the vendor consistently chooses to report the income
					 from installment sales on the accrual or cash receipt and disbursement basis,
					 the sales will not be treated as being on an installment plan.
Where real property is sold and the seller accepts
					 indebtedness secured by the real property in return and later repossesses the
					 property, the gain is limited and no loss shall result to the seller because of
					 the repossession of the property.
Gain on repossession shall be limited to the lesser
					 of:
(1) Total payments received before
				  repossession less the amount of the gain from original sale reported as income
				  before repossession; or
(2) The
				  gain on the original sale (selling price less adjusted basis) reduced by income
				  reported before repossession and by repossession costs. Repossession costs
				  include money or fair market value of property paid or transferred by seller in
				  connection with repossession.
Example:
In 1990, Brown sold property for
					 $60,000.00 having an adjusted basis of $48,000.00. Brown qualifies for
					 reporting the $12,000.00 gain (20% of selling price) by accepting an initial
					 payment of $10,000.00 and evidence of $50,000.00 liability secured by the
					 property to be paid in five (5) annual payments of $10,000.00. In 1994, the
					 purchaser defaulted and Brown, at a cost of $500.00, repossessed the
					 property.
Prior to repossession, Brown had received payments
					 amounting to $40,000.00 and had reported $8,000.00 as taxable gain.
Brown's recognized gain on repossession is as
					 follows:
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The basis of the repossessed property is $20,000.00.
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This regulation only applies to tax years beginning before
					 01/01/95.