Tax Break For Installment Contract
REM # F629
By Ilyce R. Glink
Summary: A homeowner sells their home using an installment contract and wonders if they need to pay capital gains taxes on the balloon payment. Ilyce suggests that they may have to pay tax on the interest paid if the home was sold via an installment contract.
Q: After living in our home for 13 years we entered a contract of sale with
a buyer which allowed them to purchase the property for no money down and to
pay us for it based on a 30-year mortgage that was to balloon after five years.
The effective date of the contract of sale was December 1999 and the buyers made the agreed-upon balloon payment this past December.
Since we have not lived in the house over the past five years, is our profit subject to capital gains tax? Or for tax purposes can we use December 1999 as the effective sale date?
The profits from our sale are well below the $250,000/$500,000 single/couple limit.
A: It sounds as though you have not owned this property for five years. If
the buyers bought it from you in 1999, that year would be the effective date
of the sale.
Since you were below the limit in terms of the amount of gain you realized from
the sale, you were under no obligation to even report the terms of the sale
to the IRS. In 1999 you would have had the ability to exclude from tax up to
$250,000 of profit if you were single or $500,000 if you were married.
My guess is that any profit you made on the sale of the home was below these
amounts and that you did not have to pay a tax on your gains. You may have to
pay tax on the interest paid if you sold your home via an installment contract.
For more details, talk to your tax preparer or the real estate attorney who
helped you close the deal. You can also get more information from the Internal
Revenue Service website (IRS.gov). Look up
Publication 523, “Selling Your Home.”
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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