Tax Consequences Of Seller Financing?
What are the tax consequences to a seller who is leaving their equity intact when selling, specifically in regards to a potential capitol gains exclusion on their primary residence?
Here is the situation: I have agree to purchase a home from a seller for a price of $231K; I am taking the existing financing subject to ($118K) and the seller is willing to leave the rest ($113K) in the home until I cash them out when I resell the home. Over the past 5 years, the seller lived in the home as primary residence during years 1 & 2, rented it out during years 3 & 4, and is now halfway through year 5.
The question is, what are his tax consequences if I do not cash him out before the end of this year? Does he need to claim the income upon cash-out and pay capitol gains if after the 5-year window? Or does he claim the $113K in equity now and not pay any gains?
Any help would be appreciated.
No tax consequence. Owned & occupied 1st 2 years. Sold within 5 years. Up to $250K tax free if single, $500K if married. Interest on note will be Ordinary Income.
I mostly agree with pmatheson1. You have purchased the property on an installment sale before the 2 of 5 year primary residence window closed for the seller.
Interest collected on the seller carried financing is ordinary income as received.
Profit received is first applied to depreciation recapture at 25%. After all allowed depreciation is recaptured, the balance of the sale profit (that is profit from appreciation) is tax free even though it may not be received in full until a later year.