Tax question: I owner-financed the sale of my home- is income taxable

I financed the sale of my home at the beginning of 2013. This is the first income tax return where I’ll deal with that income. The buyers gave me a down payment and they send me a check every month. Is that income taxable?* I’m guessing it is, but on what basis/at what rate? I did some google searching but found mostly info from the buyer’s side.

  • I do have a tax professional prepare my return and have done so for the past 38 years. But just wondering about this today…

The interest certainly is. (We found out the hard way a few years ago.) The principal would depend on how much of a profit you’re making.

Note the profit is going to be computed based on the price you originally bought plus the cost of capital improvements to the house. So, if you bought at $50k and put in a $10k kitchen, you’d compute profit based on up to $60k.

And, depending on how long you’ve owned and lived in the house, you may be able to exclude a fair amount (up to $250k filing singly and $500k filing jointly) of the profits from your taxable income.

If the profit from the principle is taxable, you’d generally only claim taxable income on the part you received that year, meaning your taxable income on the profits of the sale of the house are spread over the term of the loan. That’s on top of the separate tax on the interest income.

I believe you also need to consider, in addition to the interest income, the profit on the house as a whole as capital gains. For example, if you paid $100,000 for the house total, but you sold the house for $120,000, then $20,000 capital gains reveue is built into the mortgage, and I believe you are responsible for paying tax on that each year. I don’t know how this is calculated, but the first year would include the down payment plus any increase in the buyer’s equity that you are recording for that year. As noted above, you may be exempt from capital gains tax if this house qualifies.

I am not a tax accountant, and I think you should consult one.

Did you buy another house? If you effectively reinvested your “profit” into a new home purchase it becomes your new basis and you may not owe taxes on it at all.

Interesting replies. Thank you. :slight_smile:

My late husband and I bought the 2,200 sq. ft. house on one acre in 1992 for $58,000. A gorgeous house in a rural setting that a friend referred to as “pretty fucking idyllic.” Over a period of years, we added land usually at around $1,200 per acre, until there were 13 acres. My late H and I lived there for eight years and I lived there an additional 12 years on my own after he died. Now the land is going for $10-$15K per acre. We picked a good spot.

We/I made NO improvements to the house. None. Not any. One of the reasons I financed was that my neighbors wanted to buy it, since the land was contiguous with their property and they already had something of a Hyannisport compound going there, and there was no way any mortgage company would finance.

I sold the whole ball game for $200,000. Maybe too little, but I made a huge profit and I reallyreallyreally wanted them to buy it. They are utterly reliable and committed to staying in that area forever. They’ve already made a lot of improvements because they’re young, able-bodied, and handy. They’ve sent me some pictures, but the whole sale/move was so emotional for me I can barely stand to look at them. However, I’m glad they’re there and fixing it up.

I turned 65 about nine months after we closed–does that make a difference? I’m now a blissfully happy renter with a saint for a landlord, and he lives one block away. Never want to own another home again. I’m not temperamentally suited to it.

My tax preparer will handle all of this, but I appreciate the info.

AIUI, you’ll owe capital gains taxes on the $142,000, but since you are owner financing you might be able to to offset it over multiple years.

Actually, I don’t think so.

It looks like she used it as a primary residence for at least two years and owned the property for 5 years and is filing single.

She should be able to exclude up to $250k in capital gains in the sale of her primary home in this case. She has a tax professional, who can do all the paperwork and verify, but I’d be surprised if she was on the hook for anything but the interest income on the financing deal.

It’s be a different case if she made over $250k in profit on the sale (which, yes, could be split over multiple tax years as the money came in), but even then it looks like the capital gains would only be assessed on the amount over $250k in profit.

Not quite, the base will include what they paid for the additional 12 acres.

See post #3. That is not true any more, and there was always a one time exemption.

I financed the buyer of my house in 1980, and had to pay taxes on the interest income, but there was no capital gains so that was not an issue.

Not entirely relevant to this thread, but if you’re 65 and have purchased new property, don’t forget to file the age exemption paperwork on property tax in your local county in Texas.

You’ll still owe state property tax, but it’ll be capped at the tax you paid when you were first eligible for the over-65 exemption no matter the change in your assessment (you can pay less than the cap if the assessed value drops but never more than the cap), and there’s an increased exemption to boot.

Do you mean if I bought another house? I didn’t. I’m renting now and loving it! To quote Maxwell Smart.

I turned 65 the same year I sold the house (2013).

A lot of states and/or counties have senior breaks of one form or another. Some are only if your income is quite small. It can really pay to check into this no matter where you live.

To the OP: The IRS has very specific rules about the gains on a home sale. Far too complicated to go into here. Start by reading their info. You may need a real tax advisor given that you are receiving income over several years.

I’m renting now. I didn’t buy another house or any property. I have a tax preparer who has done my taxes for 38 years. I’ve been self-employed for 25 years and need someone who can dig down and find all the deductions and tiny print.

Speaking of tax breaks, however, I do own a rental house that I rent out. I should look into the property taxes on that one.

I’m glad there are people who want to do this stuff for a living, as it would not be me.

If you are thinking about the provision of the tax code that let you defer the capital gain on a personal residence by buying a replacement residence, that was repealed in 1997.

If you are thinking about a Section 1031 exchange, that does not apply to personal-use property.