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.
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.
Principal payments on installment sales are reported
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