Mortgage Interest Tax Deduction Calculator - Tax Considerations When Planning a Land contract
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Tax can have a major impact on your rental property's lowest line. Do not overlook tax implications when planning for owner financing deals, like a land compact (a.k.a real estate contract, or compact for deed).
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The legal title is not recorded or transferred until the buyer fulfills the contract's obligations usually a few years from the Closing. However, your asset is carefully sold, in Irs rules, when a real estate compact is signed.
From the distributor perspective, the capital gains (if any) would be recognized as an installment sale and would be recognized proportionally as the vital payments are received. As a seller, you cannot depreciate the property, and cannot engage in a 1031 transfer at the final sale. You would description interest earnings on the mortgage payments received, and the mortgage payments you make would be deductible as venture interest on program A.
It's a great tax benefit to pay capital gain tax over the years straight through installment sale if you have a big gain and are not inspecting 1031 exchange. However, you will lose the ability to take depreciation and mortgage interest deduction. Value carefully your tax situation before deciding on your best strategy - Be it Long Term Lease To Own or Real Estate Contract. Always consult a tax pro for your private situation.
The buyer in a land compact can deduct the interest and tax quantum of his payments from his earnings if he itemizes, and in the case of an investor who uses the asset for business, can deduct any expenses linked to the property, and can depreciate the asset and any improvements he adds.
A modern hot topic is that if the buyer of a real estate compact qualifies for the 00 tax credit. Irs does not yet have a formal explanation, but a lot of buyers, who do not qualify for a approved loan, will jump into real estate contracts to claim the tax credits set to expire in April 2010. Based on Irs, If the taxpayer obtains the "benefits and burdens" of ownership of a house in a distributor financing arrangement, then the taxpayer can claim the prestige even though the distributor retains legal title. Factors that indicate that a taxpayer has the benefits and burdens of ownership include:
1. The right of possession,
2. The right to fetch legal title upon full cost of the buy price,
3. The right to establish improvements,
4. The promulgation to pay asset taxes,
5. The risk of loss,
6. The accountability to insure the property, and
7. The duty to enunciate the property.
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