Basic Owner Finance Questions

[Curtis C.]

Just a few basic questions:

1. When you sell a owner financed house, technically, by law your supposed to pay taxes on it. You just sold that house thats worth 120k. But you only put 75k total into it. As far as the government is concerned you just made that full 120k and they are going to try and tax you on it. How do you prevent this from happening?

2. Is there a right of redemption period if you have to foreclose on someone?

Also please add in any additional pitfalls to owner financing a house I might not be aware of.

Thanks

[Jon Holdman]

First, you really want to spend some time with a CPA before doing this.

1. When you sell a house, you pay capital gains taxes on the gains. Gains are the sales price, less selling costs, less purchase costs, less buying costs, less any improvements. So, if you sell for $120K, pay $12K in various closing costs, and spent $75K total for the purchase, rehab and buying costs, then you have a taxable gain of $33K. If you've taken any depreciation, that increases your gain and you have to pay a different tax on the unrecaptured depreciation. The $12 in closing costs goes out the door to whoever charged them. The $75K you spend goes back into your pocket, no taxes.

Some states do have transfer taxes on the full amount.

When you sell with owner financing, life is even more complex. I can't fully explain it. But the payments you receive are a combination of returned principle (the $75K) above, gains (the $33K), interest, and unrecaptured depreciation. See why you MUST have a CPA?

2. Depends on the state. Colorado, not for the borrower. Yes for junior liens. IDK about Texas. I do know foreclosures can be done very quickly in Texas.