Installment Sale, Related-Party Resale, and the Second Disposition
Priya sells a parcel of investment land to her wholly owned corporation, Priya Holdings Inc., for $600,000 on an installment basis: $100,000 down in year 1 and $100,000 in each of the next five years. Priya's adjusted basis in the land is $200,000, so her gross profit is $400,000 and her gross profit percentage is 400,000 / 600,000 = 66.67%. In year 2, before the remaining installments are paid, Priya Holdings Inc. resells the land to an unrelated buyer for $750,000 cash. Priya has already reported year-1 gain on the installment method. Her accountant asks whether the year-2 resale accelerates Priya's gain and how to compute it.
1. Does the related-party resale accelerate Priya's remaining installment gain, and what is the governing rule?
Read the worked answer
Yes - §453(e) (related-person installment sales) accelerates the seller's gain when the related buyer disposes of the property before the seller has collected all installments.
Mechanics:
- Priya and Priya Holdings Inc. are related persons under §453(f)(1) (which cross-references §318 and §1239(b) - a corporation more than 50% owned by the seller qualifies).
- When the related buyer resells the property, the original seller (Priya) is treated as having received the remaining installment obligations at that time, to the extent of the amount realized by the related buyer.
- The acceleration is capped at the amount realized by the related buyer ($750,000) or the remaining installments, whichever is less.
So Priya must recognize in year 2 the gain attributable to the deferred payments, limited by the resale proceeds. This prevents taxpayers from using a related party to defer gain while the related party cashes out.
2. Compute the additional gain Priya recognizes in year 2 as a result of the resale, and explain the limitation.
Read the worked answer
Step 1 - Remaining unreported gain at time of resale. Total gain = $400,000. Year-1 payment = $100,000 × 66.67% = $66,667 recognized in year 1. Remaining unrecognized gain = $400,000 − $66,667 = $333,333 (attributable to the five remaining $100,000 installments = $500,000 of payments × 66.67%).
Step 2 - Apply the §453(e) cap. The acceleration is limited to the lesser of (a) the amount realized by the related buyer ($750,000) or (b) the remaining installment obligations ($500,000). The lesser is $500,000 of deemed payments.
Step 3 - Gain recognized in year 2. $500,000 deemed payments × 66.67% = $333,333.
Because the resale proceeds ($750,000) exceed the remaining installments ($500,000), the entire remaining gain is accelerated. Priya recognizes $333,333 in year 2 in addition to any year-2 scheduled installment - in effect the full $400,000 total gain is recognized by year 2 ($66,667 + $333,333). No further gain is reported in years 3–6.
3. Suppose instead Priya Holdings Inc. had resold the land for only $250,000 cash. How would the year-2 gain differ, and what happens to the remaining installments?
Read the worked answer
Acceleration is capped at the buyer's amount realized: $250,000.
- Deemed payment = $250,000; gain accelerated = $250,000 × 66.67% = $166,667 in year 2.
- The remaining installment obligation continues for the balance not yet accelerated. Priya still has $500,000 of scheduled installments; $250,000 of those is treated as collected via the resale, leaving $250,000 to be collected under the original schedule (years 3–6).
- Remaining unrecognized gain after year 2: $333,333 − $166,667 = $166,668, reported as the remaining $250,000 of installments are collected ($250,000 × 66.67% ≈ $166,668).
Key principle: §453(e) accelerates gain only to the extent of the related buyer's proceeds; it does not force recognition beyond what the buyer actually realized. Any unaccelerated portion stays on the original installment schedule.