When are capital gains realized if I sell a house and do owner financing?

Question

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?

Answer 1

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.

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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.