Selling a property via owner financing inquiry

[tojodorian]

Greetings,

We are in the process of trying to sell a property, this property was our primary home from 07/2014 - 10/2018. We are having trouble finding a cash buyer so are considering the possibility of selling via owner financing.

My curiosity is this, if we sell this property via owner financing and take a down payment, then monthly payments to pay of the remainder, will this all count as unearned income and be taxed as such, or how does that work? In the past when we've sold a property we simply list our cost basis of what we originally paid, then list what we sold it for less closing fees etc to figure out our capital gain or loss. Does it work the same when owner financing or since we'd be getting monthly payments is that treated like rental income?

Thank you for your time & consideration.

[Carl]

It's treated as investment income.

You ***NEED*** to seek legal help and advice on this in your local jurisdiction. I strongly advise against doing a seller financed loan because in my experience and wide breath of knowledge of those who have done a seller financed loan, chances are 100% that you will be foreclosing on the loan within 5 years. So your paperwork needs to be in **PERFECT*** order, or you'll find yourself in a never ending nightmare from which you will never awaken.

With a seller financed loan (which is referred to as an installment sale in the TurboTax Program) you can claim the entire amount (selling price and interest) in the year of sale (worst thing you can do) or spread it out over the life of your loan.

We are having trouble finding a cash buyer so are considering the possibility of selling via owner financing.

All buyers are cash buyers. The buyer is the one who takes out the loan and you get the cash up front. So if a prerspective buyer doesn't qualify for a loan from a reputable lender, there's a reason they won't loan them money. So why on earth would you want to even risk it? Now that's not a rhetorical or smart arse question. There *are* a few valid reasons to do this, knowing full well that you will probably be foreclosing on the buyer within the next 5 years.

[tojodorian]

Thank you for being brutally honest, I had no intentions of actually agreeing to an owner financing situation, was merely putting out feelers to learn more about the tax ramifications of such a situation & I appreciate your blunt feedback, it simply solidifies my desire to never enter such an agreement. Thanks for taking the time to comment.

[Carl]

Every year at tax season, we see quite a number of posts here where the seller has foreclosed on their seller financed loan and taken repossession of the property. Of course, they're asking how to deal with it on their tax return. It's perfectly doable with TurboTax. But it's not easy or simple.

There is a location in my county that no bank will finance with good reason. The only possible way to sell is by owner financing if the buyer does not have the cash. There's about a 5 mile stretch along Coastal Highway in Vilano Beach where there are houses on the beach between the highway and the water. Every time a hurricane comes through a fair number of those houses experience extensive damage or are a total loss. For about 10 plus years now there is no insurance company that will insure them. Even the state sponsored "high risk" insurance will not insure those properties. As you know, a reputable lender will not finance uninsured property. So the only possible ways to sell these houses is either the buyer pays cash in full up front at the closing, or the seller agree to finance it. That's just one valid reason for a seller financed loan that I'm aware of. But it's extremely high risk. Since the property will not be insured, if it's lost in a hurricane and the buyer stops making payments, you can still foreclose. But all you'll have left in the end "if you're lucky" is the land - provided of course it wasn't washed out to sea by the hurricane.

Presently a number of property owners have legal action in process against the state to buy them out, since the state will not insure them and neither will anyone else. Overall I hope the state ends up buying them out for a fair price. As it stands now I can't see anyone in their right mind wanting to purchase uninsurable beachfront property even if they have the cold hard cash in their hands.

[Anonymous]

are you trying to sell without using an agent?   I would suggest you interview a few, so they can give you their ideas on what to do to make the property sell.