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Tax Talk with George Saenz

Ask the tax adviser

Capital gains taxes on the sale of rental property

Dear Tax Talk:
My parents have a house that has never been their primary home. They have owned it for three years. They rent it out. The current renters are going to buy it, and my parents are going to hold the mortgage with a down payment and then monthly payments to them. Will they face capital gain taxes? All the information I find is about primary homes, not rentals. Please help.
Thank you,

Dear Jeanette:
The sale of a rental property is subject to income tax at capital gains rates. As your parents will finance the sale by holding the mortgage, they have the option of reporting the gain over the time that they collect the principal portion of the mortgage. This option is referred to as an installment sale, i.e., the payments are received in installments that will extend into future years.

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Principal payments on installment sales are reported on IRS Form 6252. IRS Publication 537 explains the rules of installment sale reporting.

Interest on the mortgage is ordinary income, as opposed to capital gain income. It is reported together with other interest income on Form 1040 Schedule B.

-- Posted: Sept. 25, 2001

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