Home sale under land contract (Bond for deed) - Tax consequences for sellers?

[nativecrafts]

I am planning to sell my primary residence after 20 years living in that house to a buyer under bond for deed terms (or land contract). Bond for deed will expire in 36 months with balloon payment at the end of the term. 12% down payment. Since this is primary residence, this will qualify for tax exemption if capital gain is less than $500,000 for married couple, if sold immediately for a full price. What are the tax consequences if the home is sold under bond of deed contract (seller financing)?  I will be paid off in 37 payments in installments. I will be getting interest plus principal for 36 months and at the end of 36 months, I will get all remaining payment in a lump sum. Do I need to pay income tax on the interest I receive and also tax on principal I receive? Shouldn't the payment I receive be tax exempt since I am selling my principal residence? 

[Mike9241]

you first fill out the home sale worksheet.  you have an installment sale, so if the gain is more than $500,000 or was ever a rental you link it to form 6252. otherwise don't bother becuase none of the gain is taxable. The interest receved each year is taxable and you can report it by using 1099-INT

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if the gain is more than $500K and was never a rental then only gain in excess of the $500,000 is taxable on the installment basis.   so say gain in excess of exclusion was $200,000 and you received 20% of the proceeds in 2022 than only $40,000 of that is taxable in 2022 along with the interst received. the balance of the gain will be taxable each year based on the % of sales proceeds received

interest is always reported as ordinary income in year received and not included in the sales proceeds received. 

[nativecrafts]

Great insight! Thanks! Let us play with numbers!

Say i bought home 20 years ago for $200,000. It was principal residence all those years. Never rented. Home is sold under Land contract seller financing deal, 3 year balloon with 15% down payment.  Sale price is $600,000.00. So capital gain is $400,000. Payment will be made initial down payment of $90,000 and p&T, tax/insurance over the next 36 months. Tax/ins will be paid directly to county/insurance company. I get p&t only. I pay tax on interest I receive. Thats ok. Whatever is the remaining balance by the end of 36 months  will be paid in a lumpsum on 37th month. The lumpsum amount will be huge.

Do i need to fill out home sale form each of those 3 years showing how much principal i received? or can i just say my initial capital gain was $400,000 (which is tax exempt) and get it over it and keep on paying tax on interest i receive each of those three years?

Thanks again. Your response makes sense and very logical.