It sounds like an installment sale.
Your gain would be deferred.
You can add the road to the cost you originally paid for the property and any closing costs
Each installment payment on a home usually consists of three elements:
a partial return of the seller’s adjusted basis in the property sold, which is not taxable to the seller,
a portion of the your realized gain on the sale, which is taxable as a capital gain, and
accrued interest, which is taxable as ordinary interest income.
Each year, as you receive payments from an installment sale, you have to determine how much of the year’s payments is taxable as capital gains and how much is a nontaxable recovery of the your cost basis. The tax payer multiplies the non-interest portion of the total payments received in that year by the gross profit ratio for the sale.
The gross profit ratio is the your total anticipated gross profit, divided by the total contract price. The anticipated gross profit is the contract price less your adjusted basis starts with the original purchase price, including initial closing costs: then increased by any capital improvements and the selling expenses incurred in the sale: then reduced by any depreciation taken, or that could have been taken, during the time of your ownership.
The “contract price” is equal to the selling price, reduced by the amount of any qualifying indebtedness which is assumed or taken subject to by the buyer. Qualifying indebtedness may include any a mortgage or other debt encumbering the property, plus any debt that is incurred or assumed by the buyer incident to the buyers’ acquisition.
Qualifying indebtedness is, however, limited to your adjusted basis in the property. Thus, if you have refinanced the property and taken cash in an amount that creates indebtedness greater than your adjusted basis, the qualified indebtedness for purposes of calculating the contract price is limited to the adjusted basis. In other words, the gross profit percentage can never be greater than 100%. Note that the lender holding any existing mortgage must approve any loan assumption.
Consider the following example of the sale of raw land. In Year 1, Seller sold Black Acre to Buyer. Buyer paid $200,000 in cash at closing and agreed to assume the current $200,000 mortgage. Seller agreed to seller-finance $800,000 of the purchase price over a five-year installment note, with the first installment being due in Year 2.
Selling price for Property
Less: Mortgage assumed by Buyer
The “contract price”
Selling price for Property
The gross profit of $400,000 is divided by the contract price of $1,000,000 to determine a gross profit ratio of 40 percent. In applying the gross profit percentage of 40 percent to the $200,000 of cash received in Year 1, the Seller will recognize $80,000 of gain in the year of the sale. If the principal portion of the payments received by Seller in Year 2 is equal to $160,000, Seller will recognize gain in Year 2 equal to 40 percent of $160,000, or $64,000. (An example for real property that depreciates (such as an office building) would be more complicated because the IRS taxes the gain from appreciation at a maximum rate of 15% and the gain resulting from the tax depreciation at 25%.)