« When is it too late to use an Ensured Installment Sale (structured sale)? | Main | So, what is this “3rd party assignment company” for a structured sale? »
Calculating the cost basis, deferred gain, and interest income of a Structured Sale
By mauch | March 1, 2007
Many people have been asking us how to calculate the cost basis as well as the amount of deferred gain and interest income in each structured sale payment. So… I thought that I would make a post here to give everyone that information at once.
Calculating these are pretty simple, but not as straight forward as you might think. Here we go:
First off we want to find out what your true ”value” of the property/business is. Simply take the sales price and subtract any selling expenses you will incur. Now you have your value that will be used to calculate the gain later on.
Next, we need to calculate the net adjusted cost basis. This is basically what you paid for the property plus any improvements you have made to the property minus depreciation you have taken over the years. Have you added a garage? Placed a new asphalt parking lot? etc. This will give you your basis.
To calculate the total gain simply subtract the net adjusted cost basis from the value.
- Calculating the Value -
(Sales price) - (Selling expenses)
- Calculating the Net Adjusted Cost Basis -
(Your purchase price) + (Improvements to property/business) - (depreciation taken)
- Calculating the Capital Gain (or gross profit) -
(Value) - (Net adjusted cost basis)
Now that we have the basic calculations that we need out of the way, we will go on to figure out what consists of each structured sale annuity payment. To do this we will calculate the gross profit (capital gain) percentage of each payment by using the following formula.
Gross profit (capital gain) ____________
Contract price (sales price on contract) ____________
Gross profit percentage (gross prifit ÷ contract price) ____________
So, here is a brief example.
Gross profit (capital gain) is $100,000
Contract price is $400,000
Gross profit (capital gain) percentage = 25%
This means that of each structured sale annuity payment, capital gain makes up 25% of each payment. This is just one simple example.
I would suggest you contact your CPA about calculating these numbers. Just keep in mind that the Structured Sale is reported as an installment sale for tax purposes… so the steps that you need to take for reporting an installment sale are the same with the Structured Sale.
You might take a look at IRS Form 6252 to see exactly how the IRS wants you to calculate the breakdown for the Structured Sale. IRS Form 6252 is the form required for reporting installment sale proceeds… so it is an excellent place to start.
Topics: Calculations, deferring tax, Structured Sale |