What is involved financially with selling an investment property in Pennsylvania?

Apr 27, 2016
askacpaiconWe are selling an investment property (five townhomes and commercial space) and will hold the mortgage for the buyer for five years. The buyer is giving us a down payment. The remainder of the mortgage will be paid in full in five years at about a 6.5 percent interest rate. Can I spread out my capital gain over the five years? Do I need to account for interest income separately from the capital gain? What IRS and Pennsylvania forms are needed? I will be moving to Florida later this year, but the investment property is in Pennsylvania. Will I need to pay capital gains tax to Pennsylvania for the five years even if I no longer live in the state? This is not a 1031 exchange.

The question is answered below in sections, based upon the information given.

  • We are selling an investment property (five townhomes and commercial space) and will hold the mortgage for the buyer for five years. The buyer is giving us a down payment. The remainder of the mortgage will be paid in full in five years at about a 6.5 percent interest rate. Can I spread out my capital gain over the five years? 

    You are required under an installment sale to spread the gain over the period of time it is received. However, you can "elect out" of the installment sale, and claim the gain on the sale in the first year of the sale. The interest income is claimed when actually received, which would be over the five-year period, regardless of how the gain is claimed.
  • Do I need to account for interest income separately from the capital gain?

     Yes.
  • What IRS and Pennsylvania forms are needed?

    Federal Forms 6252, 4797, Schedule B, and Schedule D. Pennsylvania Forms Schedule D-1, Schedule D, and Schedule A.
  • I will be moving to Florida later this year, but the investment property is in Pennsylvania. Will I need to pay capital gains tax to Pennsylvania for the five years even if I no longer live in the state?

    The interest income from the installment sale is taxable to the client in Pennsylvania, whether a resident or nonresident, because the investment property is located in Pennsylvania. However, if you "elect out" of the installment sale and the entire gain is reported in the year sold, interest received on an installment sale for the period as a nonresident of Pennsylvania is not subject to Pennsylvania tax.
This answer only addresses the tax issues you raised related to the sale of your property, but does not address the overall affect this may have on your tax status as it relates to your overall financial picture. You may want to contact a CPA to review your overall financial picture. If you don’t have a CPA I suggest that you ask friends and family for recommendations, or use PICPA’s CPA Locator.  

Answered by: Loretta M. Tubiello-Harr, CPA, a principal with Tubiello-Harr & Associates LLC in Coopersburg, Pa.
Pennsylvania CPA Journal

Read the latest from the Pennsylvania CPA Journal online or via the mobile app and digital edition.

Read More

CPA Now

Get the latest info on professional trends, management, and leadership skills on CPA Now.

Read More

Premier Sponsors

Platinum Sponsors

Gallagher Bollinger Logo
CPACharge


Silver Sponsors

Paychex logo
Capstan Logo
epsa USA


Bronze Sponsors

sage-logo_bright_green_rgb_2018_28469
TaxConnex_logo_TM_tagline2019
botkeeper1
Fox School of Business, Temple University


Interested in becoming a sponsor? View packages >