|
Dear Tax Talk,
I sold my house to my friend in 2004 with owner financing, and purchased another house where I live now. My friend
wants to refinance for $300,000, which is what he owes me. If I get this money, will I pay taxes, and how much? If it
is a lot, how can I reduce the taxes? What are my options?
-- Anna
Dear Anna,
If you lived in and owned the home that you sold your friend, you can still claim to exclude the gain on its sale up to
$250,000. If the difference between your cost of the old home and what you sold it for is less than the $250,000 limit
and you meet the use and ownership requirement, you won't have to pay any income tax when he pays off your note. If you
cannot exclude the gain under the home sale rules, you will usually pay tax at capital gains rates.
If the home didn't qualify for exclusion, you should have completed
Form 6252 and included it with your
Form 1040 in the year that you sold the home. This form helps you determine how much of the $300,000 balance will be
considered capital gain. If you held the property for more than a year, your gain would be long-term gain taxed at 15
percent.
The 15-percent tax is applied to your gain, which isn't necessarily the $300,000 balance outstanding.
For example, if you bought the home for $200,000 and sold it for $300,000 all in the form of the note, your gain is
only $100,000. When you collect the $300,000 balance on your note, your 15-percent tax is figured on $100,000, not
$300,000.
If you have an installment sale outstanding, the presidential elections could affect the amount of tax
you pay. Under one candidate's plan, the capital gains rate could revert to 20 percent to 28 percent, as it was prior
to George W. Bush's tax cuts. The new rates could apply to your outstanding deferred gains when collected.
|
