I Sold a House on a Land Contract, How Do I Claim It on My Taxes?

Answer

When it comes to selling their houses, homeowners have a variety of choices available to them. A land contract sale is a kind of real estate transaction that occurs when the seller of a house agrees to finance the purchase of the property by the buyer. This option is available in certain circumstances. Installment sales contracts, more formally known as land contracts, are used in the selling of homes. When it comes to taxes, homeowners who sell their houses via land contracts are required to submit taxes on any capital gains they make, in addition to any interest income they earn from the payments made by buyers.

Tip

When selling your home under a land contract, you are required to include both income from capital gains and interest when filing your taxes.

Understand Tax Implications

The Internal Revenue Service (IRS) use a proportionate method for calculating capital gains from the sale of land contracts. That is to say, you are eligible to deduct, throughout the term of the land contract, any profit you generate from the sale of your house that was accomplished via the use of a land contract. In addition, the Internal Revenue Service requires you to record on your yearly tax returns any interest income you may have earned from the sale of your house through land contract. Your monthly mortgage payments on the land contract-sold property you purchased may finally be written off as an investment interest deduction.

Report Capital Gains

The Internal Revenue Service (IRS) enables individuals who have land contracts to declare as annual income a percentage of any capital gain they have received. Form 6252 of the Internal Revenue Service is the document that should be used to record the sale of your house if it was accomplished via the use of a land contract. When you receive an instalment payment from your customer, you are required to complete IRS Form 6252 each and every year. In addition to submitting their taxes using Form 6252, sellers of homes purchased via land contracts are required to additionally submit their returns using Form 1040.

Report Interest Income

When selling a house via a land contract, the interest income that a person earns is considered to be regular income and must be declared. Interest income from land contract house sales and interest income from bank savings accounts are treated the same by the Internal Revenue Service (IRS). However, if your property contract does not allow for appropriate declared interest, you may be required to include it as “imputed” interest on your tax return. Imputed interest income is the result of making an informed assumption based on the standards provided by the IRS.

Consider Other Factors

You will no longer be able to claim any depreciation on your house once you have sold it via a land contract. The Internal Revenue Service does not permit 1031 exchanges in the sale of land contracts. A tax-deferred exchange known as a 1031 exchange involves the purchase of an identical piece of real estate to replace a residence that was sold under a land contract. A seller of property might sidestep paying capital gains tax on the profit made from the sale of the property by engaging in a 1031 exchange. When preparing your tax return for the sale of a house that was accomplished via the use of a land contract, be careful to refer to IRS Publication 537, “Installment Sales.”