I am not a tax practioner but, assuing you seller is not a “Dealer” in real estate then it is my understanding that by offering to finance the sale to you, he avoids capital gains tax and his profit is treated under the “installment sale method” for tax purposes. This means he pays taxes each year on the amount of principal and interest paid to him. Clearly there are numerous tax advantages to this way of reporting ones profit over having to shell out a lump sum especially if there has been a big run up in the properties value over its original cost basis.
owner financing tax liabilities - Posted by John F
Posted by John F on December 28, 1999 at 19:39:52:
I am negotiating to buy a property valued over 1mill with the owner financing for five years. The owner is concerned
about capital gains taxes. Will they be due as of the sale date or will he pay tax as he recieves payment?
Some of his concerns are valid but it depends on how long he has owned the property, his tax bracket and how he depreciated the property. Recapture of depreciation may be in the 25% bracket. If he has a low basis the are always CRT’s. If he gets no other income could he live off the return of his original investment and pay taxes in a 15% bracket? Too many unknowns. He needs to get with a financial/tax advisor to discuss his particular situation. Maybe he should do a 1031 exchange then borrow on the new property after he acquires it.
I do these types of deals all of the time. The owner will be charge as ordinary income on the payments you make. This makes it a good deal for them because they can expense and deduct