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. 9, September, 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:
The basis of the repossessed property is $20,000.00.
This regulation only applies to tax years beginning before 01/01/95.
