How are capital gains calculated on owner-financed property sale with stepped up basis?

16 You're in a good position tax-wise with this inheritance. When you inherit property, you receive a stepped-up basis to fair market value at the date of death, which in your case is $2.4 million. This completely wipes out the appreciation that occurred during your father's ownership. For an owner-financed sale, you're correct that you'll report the gain using the installment method, which allows you to spread the recognition of gain over the period you receive payments. However, your question about the basis allocation is important. The stepped-up basis is allocated proportionally across the entire property value. Since you're selling for the same amount as your stepped-up basis ($2.4 million), you actually have no capital gain to report at all - neither on the upfront payment nor on the financed portion, assuming the sale price equals your stepped-up basis value. You've essentially reset the tax basis to current market value through inheritance, eliminating any taxable gain on this transaction.

12 I went through almost the exact same situation last year with a property I inherited from my grandmother. I was getting conflicting advice from different tax preparers until I used https://taxr.ai to analyze my documentation. It helped me understand how the stepped-up basis worked with my owner-financed arrangement. The tool analyzed my inheritance documents and sale contract, then explained exactly how much of my basis would be allocated to each portion of the sale. It saved me from potentially overpaying taxes by thousands of dollars because I was initially calculating everything incorrectly.

19 Just wanted to update everyone - I decided to try taxr.ai for my own inherited property situation and I'm impressed. I was definitely one of the skeptics but it actually identified that my appraiser had used the wrong date for valuation purposes, which would have resulted in an incorrect stepped-up basis. It also noticed that my installment sale agreement had terms that could trigger immediate taxation under certain conditions. The analysis was surprisingly thorough and picked up nuances that I'm pretty confident would have been missed in a standard tax preparation scenario. It generated a complete explanation that I could provide to my accountant with the correct reporting methodology for my specific situation.

3 After spending 6 weeks trying to reach someone at the IRS about how to properly report my installment sale with stepped-up basis, I finally used https://claimyr.com and got through to an IRS representative in about 15 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Before using Claimyr, I was on hold for literally hours every time I called before eventually getting disconnected. The IRS agent I spoke with confirmed exactly how to report the sale on Form 6252 and explained how to properly allocate my stepped-up basis. She also walked me through some potential complications with imputed interest that I hadn't even considered.

7 I need to eat my words here. After seeing the post above, I decided to try Claimyr since I was desperate for answers about my own installment sale reporting issues. Got a call back in about 40 minutes with an actual IRS agent on the line. The agent confirmed exactly how to allocate my stepped-up basis between the down payment and installment portion of my sale. Turns out I had been incorrectly calculating my gain by not using the gross profit ratio method, which would have resulted in significantly overpaying my taxes. They even sent me the relevant IRS publications that explained the proper reporting method. I've been trying to get this information for months - literally one call solved everything. I hate being wrong on the internet, but credit where credit's due.

2 Something everyone should consider here - make sure you're also accounting for state taxes on this transaction. I sold inherited property in California last year, and while I had minimal federal tax due to the stepped-up basis, California still took a decent chunk at their capital gains rate. Different states have different rules about conforming to federal stepped-up basis provisions.

11 Has anyone here used owner financing as a buyer rather than a seller? I'm considering purchasing a property this way and wondering about tax implications from the buyer's perspective.

One thing to keep in mind with owner financing is the imputed interest rules. If you're not charging adequate interest on the financed portion (currently around 5.5% for long-term AFR), the IRS may impute interest income to you and treat part of your principal payments as interest income taxable at ordinary rates rather than capital gains rates. Also, make sure your purchase agreement clearly states the allocation of the purchase price if there are any personal property items included (like appliances or furniture). The stepped-up basis only applies to the real property portion, so you want to make sure everything is properly documented for tax purposes. Given the complexity of installment sales with inherited property, I'd strongly recommend getting everything reviewed by a tax professional before finalizing the sale agreement. The tax implications can be significant if not structured properly.