Selling farm to my son and daughter in law. If I wouldn't pay taxes on the outright sale to a private buyer, I was wondering if I would have to report the payments as income.
2006-06-23 16:54:44 · 7 answers · asked by ramblin_mo 1 in Business & Finance ➔ Renting & Real Estate
This is to my son at a very reduced rate. There isn't a portion considered rent. I own the house outright. I would insure the house and pay taxes. Simply the title transfers to him after 10 years of payments.
2006-06-23 17:18:27 · update #1
Yes...and it is pretty complex to do so. You need a competent accountant, or you will either end up in trouble or end up paying too much.
2006-06-23 17:03:28 · answer #1 · answered by Anonymous · 0⤊ 0⤋
You will have to report the rent portion of the payment on your taxes and then the option portion of the monthly payment as capital gains when you sell the place.
For example, if they pay $1000 a month and $700 of that is considered rent and $300 goes towards the downpayment, then you claim $700 as rental income on your taxes. The $300 comes to play when they exercise their option and force the sale of the property.
I am not an accountant, so don't sue me!
Regards
Based on the new info:
Then you do not have to report the income at all in a lease purchase option. However, when they exercise the option, then you have to deal with taxes on the monies that they paid.
Why don't you just carry a note secured by the property? You will then be the lender. They will get the tax benefits and pay the taxes on the property.
2006-06-24 00:02:28 · answer #2 · answered by Anonymous · 0⤊ 0⤋
Mo,
The way you describe the transaction sounds like you are not selling on a rent to own basis at all. You are selling on a land contract (or contract for deed).
In a rent to own situation the tenant will never own the property unless they exercise their option to buy. Even if they rent for 100 years. They would have to go get a mortgage when they exercise their option and then the house would sell to them.
On a land contract (aka contract for deed), you define the terms of how the payments are made (how much, for how long, what happens if payments are missed), and when the house would become the property of the person making the payments.
In a contract for deed, if the buyer defaults, then in most states the seller can perform a simple eviction instead of having to do a costly and expensive foreclosure, since the buyer does not own the property until all the terms of the contract to get the deed has been fulfilled.
In your case, if you son paid you for 10 years, the property would become his at the end of the period because he would have complied with the terms of the contract for deed.
For tax purposes, I believe this would be construed as an instalment sale (I'm not an accountant, please consult a professsional). On an installment sale you pay tax on the payments as you receive them I believe.
2006-06-28 19:54:18 · answer #3 · answered by John 2 · 0⤊ 0⤋
With option to buy one of the benefits to the seller is that the tax is deferred. This applies to money received both as a lump sum at contract signing and on a continuing monthly basis "rent credits". No tax is due on that money until the option is eighter exercised or forfeited at the end of the contract term. If the buyer exercies the option, any money received by ther seller is treated as capital gain or ordinary income, depending upon the seller's tax situation,how long the seller has owned the property and whether or not it was the seller's principle residence.
2006-06-24 00:28:03 · answer #4 · answered by candycane55 2 · 0⤊ 0⤋
In a rent-to-own agreement, the tenant pays the owner the standard rental rate for the property plus an amount that the landlord sets aside for the tenants future downpayment.
The rent is considered income, so you would pay taxes on at least the rental part.
2006-06-24 00:06:53 · answer #5 · answered by Anonymous · 0⤊ 0⤋
rental income is taxable, but you are allowed deductoins including depreciation, property taxes, etc. that will offset this taxable income. In a rent to own situation, you are the lessee until you transfer title of the property.
There is a $250,000 gain exclusion ($500,000 if you are married)on selling your residence if you've lived in it for the last 2 or more years, this is a great option.
2006-06-24 00:09:27 · answer #6 · answered by STEAKMO 5 · 0⤊ 0⤋
If you have lived in your home for at least 2 years, then you can exclude a certain portion of any gain from capital gains tax (I think it's around $500,000). Check the IRS website.
2006-06-24 00:09:52 · answer #7 · answered by jamie5987 4 · 0⤊ 0⤋