Capital Gains on Owner Financed Deal?

Question

Good afternoon Bigger Pockets Community,

Long time listener, first time caller. I have a property I purchased via land contract/owner financing deal 5 years ago. I refinanced with traditional financing and a simple fee closing in 2021. During this time I also added my wife to the title because I wasn’t married prior. We’re now preparing to sell mid-2022. The home is located in Virginia and the original deal was for $270,000 and we owe $200,000 on the property. The resale will be roughly $450,000-460,000. I’m curious if there will be any capital gains tax on the profit.

Patti Robertson · Answer

Land contract = purchase.  Unless you mixed up that term with rent to own, which some people do.  Have you lived in the property for two out of the last 5 years?  If not, that you likely owe taxes on your gain if you purchased on a land contract.  A land contract usually gives the SELLER an advantage on tax liability, but not the buyer. Sometimes not even the Seller, depending on the sellers' status as a dealer/non-dealer.

Ashish Acharya · Answer

When you originally purchased it.

Bruce Jones · Answer

@Ashish Acharya I hear you. I probably didn't ask the question correctly. Basically would the clock for capital gains begin when I purchased via owner financing through a land contract deal or did the capital gains clock begin when we refinanced as a simple fee transaction in 2021.

Ashish Acharya · Answer

@Bruce Jones, Loan has nothing to do with the gain.

Generally, your gain will be" Sale price- less original purchase price - less accumulated deprecation - less selling cost.

The loan is only going to impact your cash flow, not the gain calculation. Two different things.