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Tax implications of offering an interest-only owner financed loan when selling a house
I plan to sell a house that I allowed my deceased parents to live in rent free. I never took any depreciation or claimed any other tax break for the house. I’m considering offering an interest-only owner-financed loan with no prepayment penalty to expedite the sale, and I’d like to know the tax ramifications.
For example, assume the listing price is $430K and I offer to finance the house at 5.5 percent with $140K required as a down payment and the balance due within 5 years. Would the monthly interest-only payments I’d receive be taxable as regular income each year? And would the down payment be taxable as capital gains in the year in which the house sale closes (2025), or would the capital gains for the down payment plus the rest of the principal not be taxed until the loan was paid off? Also, are there any other tax implications of doing this?