TAX LAWS FOR THE SELLER OF A CONTRACT FOR DEED

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Tax Laws for the Seller of a Contract for Deed

In cases where qualified buyers are scarce, selling a home through a contract for deed can make sense. Homeowners might sell homes using contracts for deed because they want regular income streams rather than lump-sum payments. Selling a home using a contract for deed does come with certain tax implications for sellers. For example, contract for deed sellers usually loses any property tax deductions to their buyers.

Property Tax Deductions

Also known as land contracts, contracts for deed are installment sales pertaining to homes. A homeowner selling a home in a contract for deed retains ownership until the installment sale contract is fulfilled. However, the IRS gives the right to claim property tax credit to the buyer, not the home’s actual owner. In other words, if you sell your home through a contract for deed, you usually can’t deduct its property taxes.

Seller Tax Benefits

The IRS allows contract for deed home sellers to control how their capital gains are reported. Capital gains resulting from a contract for deed home sale can be reported over the years you receive principal payments from your buyer. Additionally, any interest income you receive from your contract for deed buyer can be declared as ordinary income. You report your contract for deed installment sale income annually to the IRS.

Reporting Requirements

Generally, contract for deed sellers use IRS Form 6252 to report installment sales in the year in which they take place. You also use Form 6252 during each year you receive income from your contract for deed. Attach Form 6252 to your Form 1040 and Schedule D, “Capital Gains and Losses.” First-year installment sales are reported on Form 6252 on lines 1 through 4, Parts I and II; and lines 1 through 4, Part II in later years.

Caution

Smart contract for deed sellers always craft thorough sale contracts covering buyer contract forfeiture circumstances. In contracts for deed purchases, buyers receive what’s called “equitable title rights” to their properties. In certain states, it can be difficult to get a defaulting contract for deed buyers out of a property if that buyer claims an equitable interest in it. Lastly, if you sell a mortgaged home through a contract for deed, the lender could foreclose if it finds out.

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