Tax implications of carrying loan on sale of apartment building?

Question

My brother just got his capital gains statement for the sale of a 4 unit apartment. He is carrying 90% of the sale price from the buyer with loan at 6% interest. Is there some regulation that allows reduction in his current tax liability?

Answer 1

When property is sold at a gain, and the seller is carrying a mortgage, a portion of the gain is reported as each payment is received. Each payment usually consists of (1) interest (2) gain on the sale and (3) basis recovery.

Interest is income. Interest is subtracted from the total of the payments made for the year. The remainder is split between the gain on the sale and basis recovery of the original purchase/investment price as a ratio amortized over the life of the loan to the buyer.

There is no tax on the original price basis recovery. Your brother pays tax only on the interest and gain received each year.

Answer 2

What Robert is referring to is installment sales. By carrying the loan, it is as if he is selling the apartment building, one payment at a time. He will report the interest he collects on the mortgage he is carrying. In addition, as he collects payments, the portion of the gain on the sale of the apartment building attributable to that payment (based on the gain attributable to the amount of the principal paid off with that payment) is recognized as taxable gain. In order to claim the installment sale treatment on the gain, your brother needs to report the sale of the apartment building as an installment sale.