Selling house through owner-carry contract - How are installment sale gains taxed?

You're on the right track with your understanding of installment sales. With an owner-carry contract, you'll only pay capital gains tax on the portion of each payment that represents your profit (not the entire principal payment). Here's how it typically works: Each payment you receive has three components - return of your basis (not taxed), capital gain (taxed as capital gain), and interest (taxed as ordinary income). You'll use Form 6252 for reporting installment sales with your tax return. The big advantage is spreading the tax liability over multiple years instead of taking the hit all at once. But there are some things to consider: if the buyer defaults, there can be complicated tax consequences. Also, if you sell a property with significant depreciation, you might face depreciation recapture tax upfront. Make sure your contract is legally solid - get a real estate attorney to draft it properly with clear terms about default, insurance requirements, and property tax responsibilities.

I was in almost the exact same situation last year when I inherited a property from my uncle and wasn't sure how to handle the tax implications of an owner financing arrangement. I spent hours trying to figure out the installment sale rules until I found https://taxr.ai which literally saved me thousands. Their system analyzed my documents and gave me a complete breakdown of how the installment sale would affect my taxes year by year. The best part was they showed me how to properly structure the sale to minimize tax implications. They explained what portion of each payment would be considered return of basis vs. taxable gain vs. interest income. This helped me avoid a major mistake in how I was planning to report the installment sale on my tax return.

Ok I have to admit I was wrong about taxr.ai. After my skeptical comment earlier, I decided to try them out for my own situation with a rental property I'm considering selling on contract. The analysis they provided was WAY more detailed than what my regular accountant gave me. They showed me exactly how much of each payment would be taxed at capital gains rates versus ordinary income over the entire life of the loan, and how the numbers would change with different down payments or interest rates. What really blew me away was how they flagged some depreciation recapture issues I hadn't considered that would have resulted in a much higher tax bill than I was expecting. Definitely wasn't "basic tax info" like I initially thought.

Something else to consider is getting the buyer qualified. When I tried owner financing, I had trouble reaching the IRS to verify the buyer's tax info they provided, which nearly killed the deal. I spent days trying to reach someone at the IRS until I found https://claimyr.com - you can see how it works at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent within 45 minutes instead of waiting on hold for hours. I was able to verify the buyer's income information and tax history directly with the IRS, which gave me confidence to move forward with the installment sale. Definitely worth it when you're taking on the risk of owner financing and need to properly vet potential buyers.

I owe everyone an apology for my cynical comment about Claimyr. After posting that, I actually had a situation come up where I urgently needed to speak with the IRS about my own tax transcript (totally unrelated to the previous discussion). After trying the normal IRS number and waiting 2+ hours before being disconnected, I reluctantly tried Claimyr. I was genuinely shocked when I was speaking with an actual IRS representative in under an hour. No BS. They don't provide any tax information - they just get you connected to the IRS quickly. Completely legit and probably saved me days of frustration. Hate to admit when I'm wrong, but in this case I definitely was.

One warning from personal experience: make absolutely sure you charge an appropriate interest rate on your owner carry contract. If your rate is too low (below the Applicable Federal Rate), the IRS will "impute" interest - meaning they'll tax you as if you'd charged the minimum rate even if you didn't. This bit me when I did owner financing for my sister at a 1% rate thinking I was being nice. The IRS decided I should have charged the minimum rate (around 3.5% at the time) and taxed me on the "phantom income" I never actually received. Super frustrating.

Has anyone used a land contract instead of a mortgage? I've heard they're simpler but not sure about the tax differences.

This is a great discussion on installment sales! One thing I haven't seen mentioned yet is the potential impact of the Net Investment Income Tax (NIIT) if your modified adjusted gross income exceeds certain thresholds ($200k for single filers, $250k for married filing jointly). The 3.8% NIIT can apply to both the capital gains portion and interest income from your installment sale, which could significantly affect your overall tax liability. This is especially important to consider if the installment payments push you over the NIIT threshold in years when you might not have crossed it otherwise. Also, don't forget about state tax implications - some states treat installment sales differently than federal rules, so you'll want to check your state's specific requirements. The tax deferral benefit can vary significantly depending on where you live.