Newbie question #3
I sold my share of my business to my partner with a note payable over 10 years. The interest on the loan is regular income. The capitol gains in the principle payments are LTCG income. The Build
Financial AssetsPersonal Loans would track the loan and record the interest income properly, but how can I enter the LTCG from the principle amounts? This not an insignificant amount, representing 10%-16% of my taxable income over the life of the loan.
Is there another way of entering this income stream or a work-around?
@humsby That's a tough one! Please correct me if I'm wrong here, but what I think you're saying is that your business partner owes you a good deal of money which is being paid over a 10-year period, and the principal contains some amount of LTCG. I can't think of a perfect way to model this such that you receive a stream of payments with components which are either non-taxable, taxable as LTCG or taxable as interest, and with those components changing over time as the loan gets paid. An alternate way to model this is to use the Build > Income > Other Income page and set up those three components as separate streams, but the problem there is that they won't vary over the 10-year period, and in the meantime the outstanding loan balance would not be included in your net worth. I suspect that would introduce more error than the way you're currently doing it, but it's something to consider.
Stuart
@smatthews51 Yes. In essence I loaned my partner $500k on a 10 year note. About 30% of that $500k was my basis. So 70% of the principle payments are taxed as LTCG. In my own Excel spreadsheet, I added 70% of the yearly principle payment to my LTCG when figuring out the tax liability just as I added 100% of the interest as ordinary income.
Pralana already can take a personal loan and assign the interest to ordinary income and not assign any tax implications for the principle amounts. I think Pralana tracks the change in interest income over the life of the loan. Would it be possible to simply add a field for the percentage of the principle that is LTCG? In a personal loan that would be 0%. In my situation it would be 70%.
I have to think there are plenty of other retirees that carry contracts on the sale of their business or business property.
@smatthews51 I think I found a kludge that may work out. This is definitely just a clunky work-around.
I setup a personal loan for the amount of the business sale load. This will properly give, as ordinary income, the interest earned on the loan.
I then added a non-existent child to my Family named "Business Sale" (I love this kid). I used a birth year of 2000 and didn't check the box as a dependent.
I then added college expenses for this child starting in 2025 and running for 9 years (the remainder of the life of the loan). In Annual College Costs I put the LTCG earned on the principle payments in 2025. Again, this is the total principle payments multiplied by the percentage of the LTCG on the sale of the business.
Then in the Assumptions -> Inflation -> College Expenses I added the delta between my general Inflation estimate and and the percentage increase in the principle payments each year. Oddly enough, for years 2-10 of the loan this is a constant percentage.
Finally I created an Other Income item that matches (as closely as able) the College Expenses above and categorized it as Capitol Gains income. BTW, this is another place where it would be helpful to be able to add 1/100ths in the Annual Increase %.
So if I'm correct, the Personal Loan will give the taxable ordinary interest income, as well as the cash flow of the principle payments. The College expense will create a non-deductible expense item that zeroes out the portion of that cash flow that is attributable to the LTCG of the loan. Then the Other Income item puts back in the LTCG taxable portion of that loan.
Can you spot anything in that convoluted mess that isn't going to work? As near as I can tell by looking through the Review, it seems to balance out OK, but I could easily be missing something.
Being able to simple add a percentage of the principle payment of a loan as taxable (LTCG in this case) would be much simpler, easier and more accurate.
@humsby Interesting and very clever! It seems okay to me but, certainly, it would be better if the tool could simply allow you to specify that some portion of the loan principal was taxable as LTCG. I agree with you that there could well be other users that could make use of this feature, possibly even including me, so I'm adding this to our enhancement list.
Thanks, Stuart
I have the same situation. I will be selling shares in my company in 2025, 2026, 2207 and 2028. Each sale will have a 10-yr note for payment. I am interested in an addition to handle this.
I am working on this now. In an upcoming release you will be able to specify the % of loan principal payments (regular monthly pmt principal, extra principal pmts, and the principal amount of any lump sum payoff) that should be taxable to you as LTCG. I repurposed Schedule D, line 12 for this: 'Long-term gain from installment sale (personal loan)'.
FWIW, I am re-working all the loans to combine the confusing 'New' and 'Existing' tabs into a single tab for defining the loan.
Charlie Stone,
Pralana
