OWNER-FINANCING TO SELL YOUR HOME:
My personal experience in owner-financing has been favorable, both financially and tax-wise.
MAKING THE DEAL:
A few years ago we decided to begin construction of a new home and sell our old home.
When we found a buyer, both of us wanted to get everything settled as soon as possible.
To avoid a lot of closing costs and other expenses we agreed to handle it through owner-financing under a Contract for Sale. Under this type arrangement, a deed is not required until the mortgage is paid off, which was favorable to our rights in the property.
Since one of my daughters is a lawyer, so we saved even more by having her prepare the contract and the lien. The buyer had a relative of his, who was a lawyer, look it over.
TERMS OF THE SALE MUTUALLY ADVANTAGEOUS
We sold it with only 10% down, which would have forced him to pay mortgage insurance premiums if he had obtained financing through a mortgage company. Our contract called for an interest rate 2¼ % higher than the interest we are paying on our present home. We both benefited by the arrangement.
We sold it on a 30-year financing period. He pays a little more toward the contract than the minimum amount required, so it will pay out a year or two sooner, but, if he continues until it is paid in full, my heirs will probably be collecting it unless I live to age 100.
If he decides to sell and pay it before the loan is paid, then we would have to find other ways to invest the money—pay our present mortgage off, if we still owe anything,
buy some stock in some fly-by-night penny stock for which my email is always getting ‘strong buy’ recommendations, or maybe some more solid stocks or bonds.
TAX EFFECT ON MY FORM 1040:
On my tax return, I include the interest I collect on the sale as income. The principal portion of the sale is totally tax-free since the house had been my principal residence and qualified for the § 121 exclusion from tax on the gain. I am not required to issue a Form 1098 to the buyer, so I send him an annual letter to notify him of the interest he has paid plus the amount of tax I pay out of the escrow he pays me. I am required to identify the interest on this as seller-financed and include all required information on my Schedule B. If the sale had not qualified under § 121, I would need to file Form 6252 and pay tax on the percentage of principal collections attributable to the gain on the sale.
REFERENCES –KEY ITEMS:
WHERE TO FILE: http://www.irs.gov/file/index.html
RESTORED DEDUCIONS for Sales Tax
OTHER FORMS AND PUBLICATIONS:
Car Expense Pub 334,463,535 (See link below)
Sale of Principal Residence Pubs 523 and IRC § 121
Sec 179 write-offs for SUVs and other equipment Form 4562, Pub 946, IRC §167
Office in Home Form 8829, Pub 587
Mutual Fund - phantom profits, reinvested dividends: Pub 550 and 564
Alternative Minimum Tax Pub 929 (individuals) Pub 542 (corporations)
Link to IRS forms and publications:http://www.irs.gov/formspubs/index.html
Link to IRS Section # http://www.taxalmanac.org/index.php/Internal_Revenue_Code
To subscribe to IRS Newswire http://www.irs.gov/newsroom/content/0,,id=103381,00.html
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Link to IRS forms and publications:
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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.
Tuesday, January 2, 2007
OWNER-FINANCING TO SELL YOUR HOME: