Before we dive in, we highly recommend you talk with a tax specialist when selling a home. There can be a lot of benefits that fit your income or situation (age etc.) that are not able to cover in this blog. J&A Home Buyers is an investor in the Katy, TX area and we buy houses this way. I have also sold a primary residence with seller financing subject to my existing loan I had so I asked these questions to my tax guy and thought I would share what I learned through the process.
Do Seller’s Loose Tax Benefits On Primary Residence If Selling With Seller Financing?
The main concern we hear from sellers is, will I have to pay my capital gains on the sale if I sell with seller financing? The answer to that is no, however you will have to pay taxes on any interest made from the loan payments that are in addition to the principal. The reason that you don’t need to pay taxes as a seller on the sale is because it can be treated as an installment sale. This means that the interest payments would be taxable for the seller who receives them and the interest payments would be a deduction for the buyer of the property. So the great news is you get the benefits of seller financing but you are not penalized on taxes!
Legal Paperwork For Taxes
At the end of the year seller’s are required to prepare a form 1098 for the buyer. This is a really simple form showing the interest payments made that year and this will be used for the buyer when they file their tax return and the seller will use this when reporting their interest earned. If the buyer and seller would like a third party servicing company like Escrow Specialists to handle the monthly payments then they can also help you with filling out this form. This can help put the buyer and seller at ease with tracking payments as well by a unbiased third party.
Do Buyers Pay Addtional Taxes in a Seller Finance Transaction?
Buyers do not pay addtional taxes from what they would pay using conventional lending. If you are an investor you will have a lot of the common tax write offs available to other investors.
- Expenses
- Property Management
- Taxes
- Insurance
- Intrest payments
Summary
Seller finance, wrap around mortgages and Subject to are all quite similar to a traditional sale when it comes to taxes. I hope this helps you get your deal done! Let us know how we can help.