Chapter § 55.13 INSTALLMENT SALE AND EXCHANGING

• Jurisdiction: Oregon

§ 55.13 INSTALLMENT SALE AND EXCHANGING

§ 55.13-1 General Rule

Generally, any cash or installment note the exchanger receives is taxed fully as boot. See IRC § 453(f)(6). Income from installment notes, however, is taxed only in the years in which payments are received.

EXAMPLE: The exchanger exchanges relinquished property valued at $1 million, with a basis of $160,000, for replacement property valued at $200,000, together with $200,000 in cash and a $600,000 note. The $800,000 in boot ($200,000 cash and $600,000 note) is fully taxable as and when received. The only deferred gain is $40,000. Proposed Treas Reg § 1.453-1(f)(1)(iv), example (4), 49 Fed Reg 18,866, 18,868 (May 3, 1984).

§ 55.13-2 Installment Sales and Deferred Exchanges

§ 55.13-2(a) Accommodator Sells Note

If an accommodator receives a promissory note from a buyer, the accommodator can sell the note for cash. The exchanger will be able to treat the transaction as part of a fully tax-free exchange. The sale of the note will be a taxable disposition to the accommodator. IRC § 453B(a).

§ 55.13-2(b) Accommodator Uses Note to Acquire Replacement Property

The accommodator can use the note and trust deed acquired on the sale of the relinquished property to purchase the replacement property. The seller of the replacement property will not be able to treat the note payable to the accommodator as part of an installment note, because the note will not be evidence "of indebtedness of the person acquiring the property," that is, the accommodator; rather, the note will be treated as evidence of indebtedness of the buyer of the relinquished property. IRC § 453(f)(3). The exchanger will be able to treat the transaction as part of a fully tax-free exchange because the accommodator, rather than the exchanger, disposed of the note for purposes of IRC section 453B.

§ 55.13-2(c) No Disposition If Accommodator Transfers Note to Exchanger

At the end of the exchange, or even if the exchange fails and no replacement property is acquired and conveyed to the exchanger, the accommodator can transfer the note to the exchanger, and it will be treated as an installment note in the hands of the exchanger. The conveyance of the note to the exchanger is not treated as a disposition. Treas Reg § 1.1031(k)-1(j)(2)(ii), (vi), example 4.

§ 55.13-2(d) Cash Boot Received in Year Two

If the first leg of a deferred exchange closes in year one but some cash remains after the...