Legal Question in Real Estate Law in California

I am somewhat cautious about offering an opinion on a tax question, since I do not practice in nor keep up with that area of the law. Nevertheless, I'd guess that a competent tax advisor would tell you that if you transfer 100% ownership to the buyer in Year One, the fact that you are carrying a loan does not turn the deal into an instalment sale. You would therefore report your entire gain or loss in your Year One tax return. In Year One and thereafter, interest received would be reported as income.

Mr. Whipple is incorrect on this one. Whenever any payment for the sale of real property at a gain is received in a year other than the tax year in which the sale occurs, it is an installment sale, whether you carry 100% of the debt or the more common situation where the buyer puts down 10% bank loans 75% or 80% and you carry back 10% or 15%. There is a special IRS form (Form 6252) that you fill out for each year of the loan that allocates how much of each dollar you get from the buyer in that year is attributable to return of capital basis, to capital gains, and to interest income. Then the capital gains and interest income roll up into the appropriate lines of your 1040 to be taxed. Take a look at IRS Publication 537 for more information.