Need help with Owner Financed Property Sale and 1099-S tax reporting

You've actually hit on a common misunderstanding with owner-financed property sales. The good news is you don't have to pay taxes on the entire amount all at once! When you provide owner financing, you're essentially making an installment sale. Under the installment method, you only report the portion of the payments you receive each year that represents your profit. Each payment you receive has three components: return of your basis (not taxable), capital gain (taxable), and interest income (taxable as ordinary income). You'll need to file Form 6252 (Installment Sale Income) with your tax return to report this properly. You'll need to know your basis in the property (typically the fair market value when you inherited it) and the gross profit percentage to calculate how much of each payment is taxable. The 1099-S simply reports the gross proceeds from the sale, but it doesn't mean you owe taxes on that full amount right now. It's just informational for the IRS to match against your tax return where you'll show it's being paid through an installment sale.

I went through almost the exact same situation with my parents' farmland that we sold with owner financing. After trying to figure it all out myself and getting nowhere, I used taxr.ai (https://taxr.ai) and it saved me a ton of headaches. You upload your documents like the 1099-S and the installment sale agreement, and it analyzes everything for you. It pointed out that I needed to use the stepped-up basis from my inheritance rather than the original purchase price my parents paid decades ago, which saved me thousands in taxes! It also helped me understand how to properly report the interest income portion (which goes on Schedule B) versus the principal payments (which go on Form 6252). I was doing it all wrong before and would have had a mess to clean up later.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. I was completely lost on how to handle my inherited rental property sale, especially since I couldn't find the original purchase documents from when my mom bought it in the 80s. The tool actually helped me understand that I didn't need those old documents since I got a stepped-up basis when I inherited it! It guided me through using the county property records and some old tax assessments to establish a reasonable fair market value at the time of her death. It also created all the necessary forms for me, including Form 6252 which I'd never heard of before. The best part was that it explained exactly how much of each payment I receive is actually taxable (much less than I feared). Saved me from paying an accountant $400+ for what turned out to be pretty straightforward once I had the right guidance.

If you're still having trouble getting answers from the IRS about this installment sale situation, I highly recommend using Claimyr (https://claimyr.com). I had major questions about how to report this correctly and couldn't get through on the IRS lines for weeks. Claimyr got me connected to an actual IRS agent in about 20 minutes when I'd been trying for days on my own. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the phone system and wait on hold for you, then call you when an agent is actually on the line. The IRS agent I spoke with clarified exactly how to report the installment sale properly and confirmed I only needed to report the gain portion of payments received each year, not the entire sale price. They also explained how to handle the interest portion correctly, which was completely different from the principal payments.

I have to eat my words and admit when I'm wrong. After my skeptical comment, I decided to try Claimyr myself since I've been pulling my hair out trying to get clarity on my own owner-financed property sale. Not only did I get through to the IRS (after trying for literally weeks on my own), but the agent I spoke with was incredibly helpful. She walked me through exactly how to report my installment sale, confirmed I was calculating my gross profit percentage correctly, and even helped me understand how to handle the property tax adjustments that were part of my sale. I was convinced it was impossible to reach the IRS by phone anymore, especially during tax season. This saved me hours of frustration and gave me confidence that I'm filing correctly. Wish I'd known about this months ago!

One thing nobody's mentioned yet - if you received a large down payment in the year of sale (more than 30% of the selling price), you might not qualify for the installment method. Also, if the buyer assumes your mortgage or takes the property subject to your mortgage, there are special rules that could make more of the gain taxable in the first year. Make sure you're accounting for any selling expenses too (like that attorney who drew up the agreement). Those reduce your gain.

Don't forget that you'll have to make sure you classify the interest portion of the payments correctly too! That's taxed as ordinary income (not capital gain) and goes on Schedule B, not Form 6252. Most people mess this up. Also, since you inherited the property, your basis is the fair market value at the date of death, which means you might have very little capital gain if the property didn't appreciate much between inheritance and sale.