Tax Breaks for Owner Financing
Owners can use trust deeds or land sale contracts to finance buyers.
Tax Benefits for Losses on Property Sales
The Tax Advantage of an Asset Purchase
IRS Sales Tax Deduction
The Advantages & Disadvantages of Capital Gains Tax
Offering owner financing to the buyer of a property can not only help you move a property, but it can also help you save money on your tax bill. Owner financing is a process by which you offer a mortgage loan to the buyer of a property, which has the potential to help both you and the buyer.
When you sell a piece of property with owner financing, it is considered an installment sale instead of a regular sale of real estate. For example, when you sell a house or a piece of land normally, the seller gives you a lump sum of money for the purchase on the closing date. With an installment sale, the buyer gives you a down payment on the closing date and then gives you regular payments over the life of the contract.
Spread Out the Gain
When you sell with owner financing and report it as an installment sale, it allows you to realize the gain over several years. Instead of paying taxes on the capital gains all in that first year, you pay a much smaller amount as you receive the income. This allows you to spread out the tax hit over many years. When you sell a property that has appreciated significantly in value, it could require you to pay a large amount of capital gains taxes.
Calculating Capital Gain
When you end up selling your house through an installment sale, you must report the capital gain as it is received. To figure this out, you must know the cost basis of the property. The cost basis is the amount you paid for the property plus any sales expenses and improvements. You then subtract the cost basis from the amount you sold the house for. For example, if you sold a house for $100,000 and you had a cost basis of $40,000, this gives you a gain of $60,000. If you spread the sale out over 10 years, this results in a $6,000 gain per year.
If you are considering offering owner financing to a potential buyer of your house, the tax breaks can play a role in your decision. Before engaging in owner financing, you must consider whether the additional tax breaks are worth forgoing the lump sum that you could get from a traditional buyer. You will ultimately pay the same amount of money in capital gains taxes, so you may prefer to simply get the taxes out of the way and use your lump sum.