SALE OF LAND CARRYING MORTAGE WITHOUT INTEREST

[dmsretired]

I purchased land for $100,000 and sold it for $,150,000, carrying the mortgage without interest.  The reported capital gain is $49,265. Am I going to have to pay taxes on this every year until the mortgage is paid off?

[zomboo]

You might benefit from a response made by PatriciaV on this subject in 2019 on Installment Sales.

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/do-i-pay-capital-gains-on-seller...

[ThomasM125]

Yes, you will spread the capital gain of $42,695 over the number of years you receive payments. You will complete Form 6252 Installment Sale Income and use it to calculate and report your installment sale income each year. It will be a percentage of the money you receive each year, based on the percentage of your gain on sale in relation to the proceeds from the sale.

You can enter the sale in the Less Common Business Situations section:

 

Or use the Help option on your top right menu bar to find a "jump to" link when you search for "Installment Sales"

If you choose the first method above you will see an option to indicate that you have installment sales:

[Opus 17]

You also must report and pay income tax on the interest you could have charged (using the applicable federal minimum interest rate) even if you did not actually charge interest.  This is called imputed interest.  Basically the IRS expects that taxpayers will handle their affairs in a businesslike manner and that includes charging interest on loans.  And they will tax you on the interest you could have received even if you didn't charge interest.  See this blog post.

https://turbotax.intuit.com/tax-tips/tax-payments/irs-tax-rules-for-imputed-interest/L7UbulHpC

The applicable federal rates are listed here.

https://www.irs.gov/applicable-federal-rates

For example, if you sold the land in April, 2023, the AFR for a long term loan was 3.95% if compounded monthly.