'Tis the Season.

• Author: Josephs, Stuart R.
• Position: Installment Sale Correction Act - Brief Article

New Legislative and Administrative Developments

Installment Method Restored for Accrual Method Taxpayers

On Dec. 28, 2000, President Clinton signed the 2000 Installment Sale Correction Act into law, completely reversing 1999 legislation that generally banned the installment method for accrual method sellers of property for sales after Dec. 16, 1999. Thus, the 1999 ban can be treated as though it never existed. Refund claims should be considered, if appropriate.

More on New Deemed Sale and Repurchase Election

The Federal Tax article in the December 2000 California CPA, Page 27, discussed the reduced capital gain tax rates available for sales and exchanges of certain capital assets after 2000. Except for taxpayers in the 15-percent bracket, the top rate for gains on assets purchased after 2000 and held for more than five years will be 18 percent, instead of 20 percent.

However, a taxpayer holding a capital asset or an asset used in the taxpayer's trade or business on Jan. 1, 2001, may irrevocably elect to treat the asset as sold for its fair market value and re-acquired for the same amount. If this election is made, any deemed gain must be recognized but any deemed loss is disallowed.

Several readers have inquired if this election can be made for a principal residence to obtain a tax-free stepped-up basis for that residence to the extent that the deemed gain is excluded from taxable income under IRC Sec. 121.

The reduced capital gain rates and the new deemed sale and repurchase election were enacted by Sec. 311 of the 1997 Taxpayer Relief Act. (Sec. 311(e)(1) authorizes this new election.) Act Sec. 311(e)(2)(A) reads as follows:

"Any gain resulting from an election under paragraph (1) shall be treated as received or accrued on the date the asset is treated as sold under paragraph (1) and shall be recognized notwithstanding any provision of the Internal Revenue Code of 1986" (emphasis added).

Consequently, it appears that gain from an elective deemed sale of a principal residence may not be excludible under IRC Sec. 121.

The 2000 Community Renewal Tax Relief Act provides that the new deemed sale and repurchase election does not apply to assets disposed of in a transaction in which gain or loss is recognized within one year of the deemed sale date (if the election applied). Therefore, this election cannot apply to assets sold in 2001.

The instructions to the 2000 IRS Form 4797 contain the following additional information. Any readily tradable...