Tax consequences of selling homes with Contract For Deed?

2 Replies

I have a W2 job that pays me well.

I am considering selling my investment home using a Contract For Deed.

I will own the home free and clear before I sell it.

Payments I would receive from the CFD would be $600-$700 per month for 10 years.

Is that income taxed at my W2 rate or is there a tax structure that can minimize the taxes that have to be paid on that income.

Thank you... 🙂

Originally posted by @Charlie Gould :

I have a W2 job that pays me well.

I am considering selling my investment home using a Contract For Deed.

I will own the home free and clear before I sell it.

Payments I would receive from the CFD would be $600-$700 per month for 10 years.

Is that income taxed at my W2 rate or is there a tax structure that can minimize the taxes that have to be paid on that income.

Thank you... 🙂

There are three components in your monthly payments. 

1)  Return of your basis (non-taxable) 

2) Gain (Sale price - basis) (Taxed at a capital gain rate) 

3) Interest per the rate that you have specified. If not specified, Imputed- (taxable at your ordinary W-2 rate)

What you are describing is an installment sale. This is the very strategy to avoid max cap gain as your cap gain is spread out. This also avoids the Net Investment Income tax of 3.8% if you were subject to. 

There are other details such as, if this was depreciated, your monthly payment would be consist of all depreciation recapture rather than cap gain. All these details will be handled by your CPA. 

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