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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Condo lease contract

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I sold my condo on a land contract (lease to own). I still pay the taxes and the condo fee. I'm taking a loss each month, but not as much as I would have to sell it outright. How do I show this amount?

I understand you did a land contract, but you also say lease to own. These are two different concepts.

Tell me this:

Did you do a trust deed?

Are you still responsible for the mortgage to the lender?

Does this "contract/lease" confer any equity in the property to the person during the course of the payments, or does transfer of title happen at the end of the contract when the conditions are met?

Is this really a lease with option to buy?

What happens when the person you are selling it to defaults? Does he have equity or does he lose all that he has paid in?

Customer: replied 7 years ago.

The buyer has the title but we have the deed and the mortgage. He loses everything if he defaults. The transfer of the deed happens at the end.

If this is not a lease with option to buy, but is really a land contract, then it is treated as an installment sale.

This means that each payment you receive must be broken down into interest, return of capital, and gain. Report each year the amount of gain based on the percentage of gain to sale price and the payments received that year.

You do have the option of reporting the gain in the year of sale. However you need to consider the following when doing that:

1. If this is a primary residence, you are able to take the maximum capital gains exclusion if you met the requirement of having lived in and owned the property as a primary residence for 2 of the past five years.

2. If this is a rental, you have to realize the recapture tax on the accumulated depreciation in the year of sale.

Please see the following information about installment sales.

Customer: replied 7 years ago.

There is no gain. We are getting $900 a month and paying out $1100. This was a better option than selling for a loss of $35,000.

In that case if there is a loss, you cannot use the installment agreement.

If your sale results in a loss, you cannot use the installment method. If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale.

Is this a rental property or is it your primary residence?

Customer: replied 7 years ago.

At the time of the agreement, it was our primary residence. Since then we have bought a house. So we have 2 mortgages to claim as well as 2 property taxes.

If the condo was you primary residence for 2 of the past 5 years, even if you have purchased two new homes, you can take a capital gains exclusion of up to 500,000 if you are filing joint returns.

If this was a rental before you sold it, even if you met the 2 year requirement, you can still take the exclusion; however you would have to pay recapture tax on any accumulated depreciation.

If you use the capital gains excursion for primary residence on the condo, you will not be able to use it again for two years.

If this was a primary residence you sold, and it was never a rental, then you can simply report the sale on schedule D.

If this was a rental unit before you sold it, then you have to use form 4797 as well as schedule D.

Customer: replied 7 years ago.

Do we even have to show it if it's not a profit?

If this is a sale of a primary residence or a rental you have to do the Schedule D and or 4797 in order to determine that it is a capital loss and include those as part of your tax return.

Remember the capital gains formula is exclusive of any mortgage pay off.

Capital gains= sale price (contract price) - (original price paid, + improvements + major repairs + HUD 1 costs not previously deducted) - cost of selling.

Also if you are charging interest on the payments, the interest is taxable income as short term gains reported on schedule D.

If it is a rental you have to pay recapture tax on accumulated depreciation even if you are selling it at a loss.

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