Tax Q&A;: Selling Property

This daily tax season column publishes questions from readers with answers from local members of the California Society of Certified Public Accountants.

Q What are the tax implications when a person sells a rental property that is owned outright and the owner wants to carry the mortgage?

* A When a property is sold for a profit and one or more payments are to be made after the close of the tax year, the installment method must generally be used. Under the installment method, part of your payment is considered to be a return of the money you put into the property, part is considered taxable gain and part is taxable interest. Gain and interest are taxed at different rates.

To determine how much of each payment is taxable gain, you must figure the gross profit percentage. The gross profit percentage is calculated by dividing the amount of gross profit by the contract (selling) price, and applying this percentage to your payments. The contract price includes the total of all principal payments to be made by the buyer. If the buyer pays selling expenses, they are considered to be payments in the year of sale.

Form 6252, Installment Sale Income, is used to calculate the gross profit percentage and income from installment sales.

If you wrote off depreciation on the property, that depreciation must be recaptured in the year you sold the property and is taxed at a 25% rate. The rest of your profit will be taxed at a maximum 20% rate. The interest is taxed at your regular income tax rate.

DAVID B. NEWMAN, CPA, Woodland Hills

* For more information on taxes and to see other questions and answers in this series, go to the Times Web site https://www.latimes.com/taxes. To find a CPA, visit the California Society of CPAs at https://www.calcpa.org.