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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13344
Experience:  15years with H & R Block. Divisional leader, Instructor
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Robin, If I buy house now (through my LLC) for $20K and sell

Customer Question

Hi Robin,If I buy house now (through my LLC) for $20K and sell it with for $30 K within 2 months with owner financing ($5K down and 20-year morgage at 8%), what are the tax implications? I'm wondering if the downpayment and monthly interest received are taxed as capital gains or as current income and whether buying though my self-directed Roth-401K would make earnings tax free?Thank youDavid
Submitted: 3 months ago.
Category: Tax
Expert:  Robin D. replied 3 months ago.

Hello, I'm Robin. Welcome to JustAnswer. I'm reviewing your question now and typing up my reply. I'll post that in just a few moments.

Expert:  Robin D. replied 3 months ago.

Selling at a gain ($10k) and short term holding would mean tax on the gain at regular rate not lower capital gains rates.

The interest and down payment if sold as owner financing and installment sell used, would be taxable in the years received.

Using your IRA would mean you would defer tax. As long as you stuck to the strict rules for no involvement in the property the tax would be deferred until you withdraw money from the IRA.

Customer: replied 3 months ago.
Robin, Could you please help me understand your reply in the context of my situation:I think I understand that the monthly interest payments received over the next 20 years of financing would always be taxed as current income... but wouldn't the initial $5,000 down payment be considered just a partial return of my original $20K capital investment and only the final $10K of principle eventually received from the house buyer considered the taxable profit, payable in the years it is received (which, according to my amortization table wouldn't start happening untill around August of 2031)?And if I were to sell the note that represents that mortgage at face value, would the timing of the note sale (ie before or after 12 months from my originally purchasing the house) make a difference in how the gain is then considered ie current income versus capital gain?
Expert:  Robin D. replied 3 months ago.

The interest is counted as income every year that is correct.

After reading over my initial response, I did not actually explain it clear enough.

If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. So you report the sale at a loss in the year of the agreement, the down payment is just part of that reporting.

So you claim the loss then every year there after you report interest income.

Customer: replied 3 months ago.
Actually, there isn't a loss as in this case as I'm buying for $20K and selling with owner financing for $30K, so ultimately there's a gain of $10K in equity. It's just not actually received until the buyer has paid long enough on the amortized loan to have let me recover that original $20K investment, which wouldn't happen till around August of 2031.So, in this case, wouldn't the initial $5,000 down payment be considered just a partial return of my original $20K capital investment and only the final $10K of principle eventually received from the house buyer considered the taxable profit, payable in the years it is received (which, according Bankrate.com's amortization table wouldn't start happening untill around August of 2031)? Am I stating that correctly?And then if I were to sell the note that represents that mortgage at face value, would the timing of the note sale make a difference in how the gain is then considered ie current income versus capital gain (ie before or after 12 months from my originally purchasing the house)?Thank you
Expert:  Robin D. replied 3 months ago.

You report a % of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. The remainder (balance) of each payment is the tax-free return of your adjusted basis.

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