Capital Gains On Contract For Deed
If I sell some vacant land by contract for deed this year would the capital gains amount I pay be based on how much principal I recieve each year? Then the interest is taxed as regular income correct?
If above is yes, then would my capital gains rate be locked in the year I sell by contract for deed or will my capital gains rate change each year with the changes in tax law?
The principal you receive has two components -- your cost basis and your profit. You are not taxed on your cost basis, it is a return of principal. You are taxed on your profit.
If you bought the property to flip, then the profit on the sale is taxable in full in the year of the sale. Your sale profit is ordinary income, not a capital gain.
If you bought the property to hold (perhaps indefinitely) for future appreciation, then a land contract sale is treated as an installment sale for tax purposes. If the profit is a long term capital gain at the time of the sale, then the amount profit you receive each year is taxed at the capital gains tax rate in effect that year. If the profit would be a short term capital gain when the property is sold, then your profit is taxed at your ordinary income tax rate as it is received.
Any interest income you receive with your installment payments is taxed as ordinary income as it is received.
Yes, installment sale tax treatment is optional.
The tax trap you want to avoid with a lump sum capital gain is having all your sale profit trigger AMT. Consult your tax advisor for specific details.
Alternative Minimum Tax. AMT tax calculations apply special rules to how your taxable income is calculated when you have a high taxable income, which could happen if you receive a large capital gain during the year.
Under AMT calculations, you do not get to use tax advantaged deductions or allowances to reduce your total tax liability.
A couple of examples, under AMT
most of your itemized deductions are disallowed or limited. rental property depreciation under AMT is calculated on a 40 year schedule and not the more advantageous 27.5 year schedule[ Edited by NewKidInTown3 on Date 06/06/2009 ]
Thank you so much for all of the info New Kid. Have a great week!