I have a second property (home) which, due to tax law changes, I will now owe income tax on gains if I sell.

But how does this work if I finance the sale? Suppose the hypothetical sale price was $100k and I paid $50k and any profits will be taxed in the 25% tax bracket. I have made all these number up with nice round figures to make the math easy.

Suppose that I finance the buyer in a private sale, suppose I ask for $10k down and $426/month for 30 years. Do I now I owe taxes on $50k, or $12.5k which I somehow have to immediately (or by the next tax return) pay? Or could I instead somehow allocate those gains on a per year basis (and if so, how?)

Does it make a difference in how much I ask for down? Suppose I don't ask for any money down, now I have no immediate income with which to pay any tax.

Does it make a difference whether the buyer is related to me or not? What if they are a family member (as defined by IRS Pub. 527)?

Does it make a difference if I sell it below market value? For instance, suppose I sell it at $14,000 under market value and gift the remainder to the buyer?

How would I even report this on my taxes?

  • 2
    In general terms you will pay any capital gains tax on the sale (on any net profits from the sale). The financing would be completely separate and you will include any interest you earn on the financing as income and pay tax on it in the year you earn that interest. – Victor Jun 17 at 0:41
  • Is the 2nd property a rental or personal use? – Hart CO Jun 17 at 1:57
  • Are you married? Is the buyer married? I ask, because both those things change the gift tax exclusion. The gift tax exclusion for 2018 is $15,000, so if both are married, you could give up to $60,000 (technically your spouse and you would each give $15,000 to the recipient and the recipient's spouse). – Brythan Jun 17 at 3:44
up vote 3 down vote accepted

You'd be selling through a contract for deed. The amount of down-payment doesn't matter, but if selling to family and sale price or interest rate are below market the difference can be considered a gift by the IRS, so mind the gift limits if intending to do that. Remember that surpassing the annual gift limit only triggers a filing requirement, but you won't actually owe any gift tax unless you've exhausted your lifetime gift/estate exemption. Also note that if you are married and the buyer is married, you can gift 4x the annual limit without triggering filing requirement.

You can spread out the capital gain over tax years as you receive the payments, you'll file Form 6252 and Schedule D each year of the contract term. You'll also have taxable interest income to report, nothing fancy here. The main downsides are that while you hold deed the buyer gets to claim the property tax deduction, and you bear the risk for non-payment. You'll likely want an attorney to prepare the contract to ensure that non-payment results in partial forfeiture of equity to-date or some such.

State laws likely vary on these contracts, another reason a local attorney may be helpful.

  • re: gifts, this is why I mentioned $14k, as anything above this would require gift tax payment... – Andy Jun 17 at 1:47
  • Added a little more regarding gift tax. – Hart CO Jun 17 at 1:50

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