Risk And Tax Effects Of An Installment Sale Of A Home
An installment sale of real estate is a variety of seller financing in which the buyer is borrowing from the seller. Why would a seller want to do this? Isn't it better to get the money up front? No, not always, especially when a sizable real estate capital gain would push you into a higher tax bracket.
What's more, to protect the seller in the event that the buyer defaults on loan payments, the buyer takes out a purchase-money mortgage. This is posted with the local property records agency, which establishes the arrangement in case disputes arise. The seller can foreclose if there's non-payment and take possession of the home. Point is, the seller can be well-protected but full and fair disclosure of the terms must be managed diligently.
In tax terms, the results can be favorable to sellers. Sellers owe no income taxes on the portion of the monthly installment payments considered to be the cost basis—that is, the amount the seller originally paid for the home. The amount of the installment payment above the cost-basis is a capital gain, however, and, depending upon the seller's income, is taxed at a 15% or 20% rate, much lower than ordinary income tax rates. Therein lies the tax advantage. The interest portion of the installment payments is subject to ordinary rates.
© 2019. All Rights Reserved.
- The New Math Of Renting Out A Vacation Home
- Opportunity Zone Investment Frenzy Requires Caution
- The Most Important Financial News Of 2018
- Retirement Income Portfolio Survival
- Five Key Factors In Funding A Child's Education
- Key Tariffs, Rates And Economic Facts To Note In Fearful Times
- High Income Earners & Roth Conversion
- Time Itemized Deductions To Reduce Taxes
- The Big New Tax Break For Pre-Retired Professionals
- Sidestepping New Limits On Charitable Donations
- The Truth About U.S. GDP Growth
- Another Member Of Music Royalty Dies With No Will
- Paying Off A Mortgage And The New Tax Code
- Key Facts On Deducting Medical Expenses
- Reduce Your Widow's Tax Bill Materially Annually