Installment sale vs. a carryback mortgage
Orlando Sentinel, November 20th, 2006
Question: In your column, you indicated a seller who carries back the
mortgage for a buyer is creating an installment sale to spread out the
profit tax. A carryback mortgage is a true sale reportable to the IRS.
But an installment sale spreads out the income and the seller retains
the title. Am I wrong?
Answer: When a property seller carries back a promissory note secured
by a mortgage or deed of trust recorded against the title, that is an
installment sale entitling the seller to spread out the capital-gain
tax payments to the IRS over the years of receiving payments from the
buyer.
When the seller retains the title, and the buyer makes monthly payments
to the seller, that is usually called a contract for deed, installment
land sale, or other similar name. It is usually treated as an
installment sale.
However, an installment-sale seller can elect to pay all the capital
gain tax in the year of the property sale. The IRS will gladly accept
your tax payment.
Either way, the interest portion of each
payment received from the buyer by the seller is taxable as ordinary
income. For details, please consult your tax adviser.
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