Installment sales.
When you sell a property that was not your prime residence, and take back a mortgage, you qualify for installment sale tax treatment. This is reported on tax form 6252. A copy of this form
and instructions can be found by
clicking here.
Assume you buy a property for $40,000, after a number of years you have depreciated it to $32,500.
You now sell it for $50,000. Because you do not get all your money at once, you do not have to pay the capital gains tax at once.
Computations
| Gross sales price |
$50,000 |
| Commission |
2,500 |
| Adjusted basis |
32,500 |
| Loan balance |
20,000 |
| |
|
| Buyer assumes loan |
20,000 |
| Seller takes back second mortgage |
17,000 |
| Down payment |
13,000 |
| |
|
Mortgage payments in 1st year are
$750 of which $500 is interest. Then balance of $250 is recovery of principal. |
| Down payment |
13,000 |
| + recovery of principal |
250 |
| TOTAL TO PRINCIPAL |
13,250 |
| |
| Gross sales price |
50,000 |
| less commission |
2,500 |
| = Net sales price |
47,500 |
| less adjusted basis |
32,500 |
| =
Realized gain |
$15,000 |
| |
| Gross sales price |
50,000 |
| less mortgage assumed |
20,000 |
| =
Contract price |
30,000 |
| Profit ratio = Realized gain / Contract Price |
| thus 15,000 / 30,000 |
= 0.5 |
| Recognized gain in first year = Profit ratio X Principal payments received |
| thus 0.5 X 13,250 |
= $6,625 |
Please see you your CPA for help computing your tax liability.
Obviously the exact numbers will vary depending on your situation.
[Introduction] [Improving saleability] [Creating a safe mortgage] [Market your home] [Advertising your home] [A prospect phones] [Hold an Open House] [Real estate contract] [Creating a saleable mortgage note] [Create saleable business note] [Buyers credit] [Committment to pay] [Which is the better deal?] [Mortgage credit ratings] [Owner occupied] [Non owner occupied] [Commercial] [Calculate the payment] [Second mortgages] [Borrowers with bad credit] [Documents to use] [Create your documents] [Minimum documents needed] [Steps before closing] [Seller financing imputed interest] [Unusual mortgage clauses when selling a home] [Wrap around mortgages] [Escrow real estate taxes hazard insurance] [Real estate installment sales] [Mortgage unusual clauses you should have] [IRS publication 523 2003 selling your home] |
