In a real estate workout involving a partnership or limited liability company (Entity) consideration has to be given to either (i) continue holding the property in the Entity or (ii) having the Entity sell the property. The tax consequences of each action were considered in the Dec. 4, 2013,1 column including the use of the installment method of reporting the gain. This column further discusses tax considerations when the property has liabilities in excess of the tax basis of the property.
Reg §1.453-4(c) provides a general rule that in a 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, will be included in the overall selling price of the property. However, only the excess of the liabilities assumed or taken subject to by the purchaser over the property’s adjusted basis is deemed to constitute (a) a payment received in the year of sale, and (b) part of the total contract price of the property.2 Thus, to the extent the liabilities assumed or taken subject to by the purchaser are less than or equal to the seller’s adjusted basis in the property, the liabilities will not be included in the total contract price (i.e., the amount of liabilities assumed or taken subject to are subtracted from the overall selling price resulting in the denominator of the gross profit ratio being smaller) thereby accelerating the recognition of gain to earlier years under the installment method.
