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I am selling an investment property without doing a 1031 exchange and would like to minimize, or at least spread out the tax burden of the capital gains. Especially given that I expect to be in a lower tax bracket in the next few years.

Example: (tried to use round numbers to keep it simple)
If I sell the house in 2022 for $300k at a $100k profit/gain
I owner finance the sale with the buyer paying $100k down @ 5% interest over 10 years

For personal federal income tax purposes:

  • Do I still have to pay the full capital gain on $100K in the tax year I sold it?
  • OR can I defer the gains to when I receive the monthly payments over 10 years?
  • If I can defer it, how do I report the gains vs income on the loan?

Overall, does this scheme make any sense to do, or am I missing something?

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  • “Owner financing” is just you providing the mortgage instead of the buyer going to a bank, right? If so, then the sale and the issuance of the mortgage are separate transactions.
    – RonJohn
    May 27 at 21:58

1 Answer 1

6

First of all you should probably spend a couple of hundreds dollars on a proper tax advice and tax planning with a professional (CPA/EA licensed in your state).

Do I still have to pay the full capital gain on $100K in the tax year I sold it?

Yes.

OR can I defer the gains to when I receive the monthly payments over 10 years?

No.

If I can defer it, how do I report the gains vs income on the loan?

You sold the house and bought a loan. You recognize the capital gains from the sale, and you'll continue recognizing the interest income from the loan.


You may want to consider installment sale instead of owner financing. Do not attempt it on your own without legal and tax advice from a professional.

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    I planned to get a real estate attorney and CPA. I'm just looking for a sanity check before I incur those expenses. Thanks for your answer.
    – JohnFx
    May 27 at 19:47

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