What are the tax implications of selling a house and owner financing it?

Question

I want to buy a house from my grandfather but I want him to owner finance it for me. I want to know what the tax implications would be for him such as capital gains tax or tax on the interest of the note he would be holding

Answer 1

if it's his personal residence and he's lived in it 2 out of the past 5 years, he can sell it to you for up to a $250,000 gain if single and $500,000 gain if married, and pay no capital gains tax on the gain. As far as the interest on the note, that would be interest income to him, and be taxable to him, and you would get the mortgage interest deduction on Schedule A - Itemized Deductions. If it's not his personal residence, then he would owe taxes on the gain on the sale, but since you would be paying him over time, he could treat the sale of the house to you as an installment sale, and spread the gain, and corresponding taxes out over time.

Answer 2

i'm assuming you lived in the domicile a minimum of a million year. right here is the deal. The interest they pay you is often taxable earnings, you checklist it and that is taxed as trouble-free earnings (no distinction in tax fee). you ought to value interest and the minimum is stated as the appropriate federal fee. (at the instant that is working approximately 4.5% on a 9 year or longer loan.) For the correct, the subject is earnings. You calculate if the sales value is a earnings or a loss. Your value foundation is what you paid MINUS the depreciation you claimed. that is probable not plenty, yet you do ought to account for it in the year of sale with the aid of including it back to earnings. in case you owned/lived in the domicile for 2 out of the final 5 years, you could exclude as much as $250,000 earnings from appreciation. permit's say your value foundation substitute into $50,000 and the domicile is now advertising for $4 hundred,000. that could be a earnings of $350,000, and $a hundred,000 greater suitable than the exclusion. You the two incorporate all of it earnings in the year of sale or you cope with it as an installment sale. As an installment sale you may incorporate basically 25% of the correct each year as earnings. the two way, that is taxed at no greater suitable than 15%. in case you have not any earnings to checklist, you have not have been given earnings.

Answer 3

Capital gains (if he exceeds or doesn't qualify for the exclusion) would be reported in small amounts each year (a portion of each payment he receives from you).

The interest is deductible to you and taxable to him. You deduct it on your schedule A, he reports the interest income on his Schedule B & has to provide your name and SSN.

If he does qualify for the one time capital gains exclusion, he'd probably be better off receiving the entire amount from you to invest, and you getting your mortgage elsewhere.