Hi all! Can anyone answer this? If I give a seller a Contract for Deed and make principle and interest payments to them, aren’t those principle payments tax-free to the seller?
This appears to be an installment sale.
If so, the percentage of the principal that is a return of basis is non taxable, but the percentage that is profit is taxable. Any depreciation taken on the property would also affect how the profit is taxed.
Unless of course, this is a sale of a personal residence.
Hope this helps.
JoanAlyce
Thank you, that helps very much. What if the seller owns the property free and clear? Would the entire purchase price be taxable? I know the tax can be [shadow=red,left]deferred[/shadow] by using an installment sale, but is there also some way to avoid some of the taxation?
Whether or not there is a loan on the property now, is not relevant to the sellers “basis” in the property.
A 1031 Exchange is the best way to defer taxes, installment sale is next best, but death is the only way to avoid. Sounds morbid, but it’s true. The heirs receive a “stepped up” basis in the property to appraised value at date of death.
Sorry I can’t offer more.
JoanAlyce