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453 installment sale treatment Form: What You Should Know

Section 452 describes a tax- deferral plan. To be a “deferral plan ‐‑the plan ‐‑ must be both legally enforceable under §1.331(b) and must provide for an effective suspension of tax.” The law also provides that the provisions of section 453, “shall apply to any contract ‐‑ even though not executed with respect to the contract.” This means that contracts which have not been executed and are no longer in effect in the hands of the purchaser, can be treated as installment sales. Under section 455, the taxpayer may report the proceeds from installment sales in the month of the sale or the payment. Section 455(c)(1) requires that the payment for sales of the timeshare or residential lot be made in U.S. currency. Interest Paid on an installment sale and in an amount equal to the cost-base of the property, are deemed to be revenue received by the taxpayer. Interest paid on other property, however, is “income received by the investor” and will not be subject to the net investment income tax. Note that this does not include any income resulting from the sale of a timeshare or a residential lot, such as the gain on the sale of a timeshare by an investor. This is considered a return of capital to the investor. Interest in residential lots that are held longer than one year is “return of capital,” but is not includable in gross income. The tax law provides that interest on installment sales may be excluded from income if the taxpayer elects to treat the interest income of a timeshare or residential lot under the installment method of accounting. The taxpayer must present to the IRS evidence that the taxpayer's timeshare or residential lot is for investment purposes only and the timeshare or residential lot is held for investment purposes solely or primarily outside the United States. Example of how the taxpayer may elect to treat home equity investments in timeshares and homes under the method: In connection with their investment in a timeshare, each shareholder had the opportunity to designate a separate home equity account to be held for investment purposes. Each shareholder also had the option to make capital gains on the sale of the timeshare at maturity over the period that the timeshare was held. Because neither of the timeshare investors ever received any interest on the time trade proceeds, their home equity interests are excluded from income under the method, even though the investors do not have to pay interest on the timeshare sales.

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