Question for CPA; Capital Gains, lump sum or payments?

[Julie Fullmer]

My Mom and her husband are selling a property they lived in for the last decade or so. This money is their retirement.  Sales price of about $259K The buyers want to pay 100K down then make payments for 5 years with a balloon then. I explained several ways to do it and told her to talk to a CPA and Lawyer. but thought I would see what you guys would say? My concern was that the interest if charged might mess up the no taxes on capital gains. I suggested raising the price and not charging interest. What say you?

[Natalie Kolodij]

Originally posted by @Julie Fullmer:

@Ashish Acharya, 

"Interest will be imputed even if you don’t charge it." By whom? If they are acting as bank and carrying the note don't they set the terms? 

 @Natalie Kolodij My understanding is they wouldn't pay any tax up to the $500K mark which they are way under. so you are saying they would? I guess I am lost, sorry.  

Can you please explain it a bit more? I guess I understood if they took it lump sum there would be no tax and I thought if it was spread out or interest was paid on it that, that would complicate things...

The interest would need to be imputed as part of the sale. It's required by the IRS. Their CPA would calculate it. 

And I apologize- I overlapped two thoughts because I didn't see that they had occupied it in your original post. 

If they've both occupied and owned it for 2 of the last 5 years then it's tax free up to $500k either way- If they do it on installment sale there will be some interest income they receive. 

If they didn't meet the 2/5 year test, or if they also rented it, ect - then it could still potentially be tax free if spread out is was what I was getting at.