Tax result from selling a house with seller financing

5 Replies

I hear and have read a lot about seller financing from the buyers side. My big question is if I sell a house I own outright and want to sell it with seller financing what are my tax liabilities.

I know I have to declare the interest from payments.

do I have to pay capital gains when the house sells. Not sure why a seller would want to take the tax hit and collect payments from the buyer.

Definitely need a good tax person.  I sell a lot on owner finance and love it but would be wondering the same thing if it was my primary residence.  I think you would not have to pay taxes on the gains, even if it took years to collect.  My concern would be that if you had to take the property back, and resell it, then you might?  Good question!

Your best bet would be to talk to your local CPA and go through your options.  Everyone's situation will be a little different.

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My accountant told me I would have to pay the gains, but I have listened to a few podcasts and they only talk about paying taxes on the interest and never mention the capital gains. I was looking that when I sell a house I have to pay the gains as I now become the bank in the equation.

@Steve Hyzny Assuming this is a rental property, not a primary eligible for section 121....

Yes, you pay cap gains, and yes you pay depreciation recapture along with tax on the interest income.

When you receive money from a financed sale, your money basically has 3 classifications...

Let’s say you bought for $100k, sold for $140k (net after swelling cost) and took $10k in depreciation.

My understanding, but verify with your cpa....

1) 2/3 of the Principal and down payment you receive will be return of initial basis, no tax

2) 1/3 of principal received will be subject to cap gains and recapture tax (I believe the recapture gets recognized first until fully taxed, but not sure)

3) any interest received is taxed as interest income 

@Steve Hyzny

These are questions you should be asking your accountant as he/she would have all the information needed to answer your question.

It depends on several factors

1) What is the cost basis in the property
2) What is the gross agreed upon sale price
3) what will you collect in year 1 and what will you collect in future years
4) What is the accumulated depreciation on the property
5) What is the interest that you will be collecting on a yearly basis