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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12520
Experience:  Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
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what taxes are paid on property that is financed to a buyer

Resolved Question:

what taxes are paid on property that is financed to a buyer by the owner? 157,500 at 5% interest for 20 years and projected pay off in five years?
Submitted: 10 months ago.
Category: Finance
Expert:  Megan C replied 10 months ago.

Megan C :

Thank you for your question, and thanks for using JustAnswer.com

Megan C :

Are you asking what income tax is paid on a home that is sold for $157,500?

Megan C :

How much tax is paid depends on what the house was initially purchased for in the beginning.

Megan C :

If you purchased the house for $100,000 and sold it for $157.500 you would owe capital gains tax on 57,500

Megan C :

The capital gains rate is 0% if you are in the 10-15% tax bracket, and 15% above that up to $400,000 where it is 20%

Megan C :

Do you have any further questions about this, or were you referring to another type of tax?

Customer:

I am not sure. the property was bought over 25 years ago and has no mortgage. it is a government subsidized rental property. i received it in divorce. I teach and am three years out from retiring. I was afraid of the tax base and offered to finance the place. what tax will come with that option? I amnot sure if I am asking the question properly.

Megan C : Thanks for your question and thanks for using Justanswer. Your tax on the sale will be the difference of what you purchased the property for and what it sells for. Your local registrar of deeds should have the purchase price documented. It should be on your warranty deed. That is what your tax is on.
Megan C : Do you have any further questions? If not, please rate as excellent so that I may receive credit for assisting you today.
Customer:

if I sell the property in 2013, financing it over a 20 year period with 15000 down, do I pay taxes on the difference at once in 2014 or on the money down and what I get each year? is there an advantage tax wise to getting the total sale amount as opposed to getting the money monthly over a period of time.

Megan C :

You will pay tax on the amount that the sales price exceeds the basis, but you recognize it as you get paid

Megan C :

This is known as the installment method.

Megan C :

A simplified example would be if you sold the property and had a $30,000 gain, and that was spread over 10 years - you would recognize $3,000 a year

Megan C :

It's a little complex area in tax, so I would invest in a local professional to handle your return

Megan C :

I could walk you through the numbers better if you knew your cost basis

Megan C :

You will also have interest income from the note you carry for the buyer. That will be taxed as ordinary income.

Customer:

thank you for your help. this is extremely new to me. Per your example, taxes would be paid on 3000.00 a year?

Customer:

I have a better idea than I did before. I can ask better questions when entering into negotiations. i can look for info I did not know I needed. thanks.

Megan C :

Do you have any further questions?

Megan C :

If not, please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today.

Megan C :

You can read more about installment sales, HERE.

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 12520
Experience: Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
Megan C and 2 other Finance Specialists are ready to help you
Expert:  Megan C replied 10 months ago.
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Expert:  Megan C replied 10 months ago.
Thanks for allowing me the opportunity to help you. Please let me know if I can be of any further assistance to you in this matter. I really enjoyed working with you – please feel free to request me again when you come back to ask another question. Simply enter "MyVirtualCPA" in the subject of your question Thanks again for being a JustAnswer customer

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