Ask the tax adviser
Capital gains on the sale of a rental property
Dear Tax Talk:
We sold our rental property, and we are carrying the loan. If we
should be paid off, must we just pay capital gains or can the payoff
money be held by a middleman so we can transfer this money into
another loan (so we won't have to pay capital gains now)?
When you carry a loan on the sale of property, you are entering
into an installment sale for tax purposes. Installment reporting
means that you recognize gain on the sale over the period that you
collect principal on the loan.
Internal Revenue Service Form
6252 is used in the year of sale and subsequent years to determine
the amount of principal that is taxable gain.
As a simple example, let's assume you sold the property
for $100,000, all of which you financed in a mortgage. Assume you
collect $1,000 in principal in the year sold. Assume further that
the property has an adjusted basis of $80,000. Your gain in total
is $20,000 or 20 percent of the selling price.
Therefore, 20 percent of all your principal collections
is gain, or for the $1,000 collected you'll record a capital gain
of $200. All of the interest received on the mortgage is taxable
and should be reported on Schedule
B (Schedule A will show up on this link first; Schedule B is
on page two).
If there is an early payoff on the mortgage, you must
report the balance of the gain in the year paid off. You cannot
roll over the gain into a new mortgage, since you received the payoff.
There is no such thing as a like-kind exchange in this instance.
Of course you won't report the interest you didn't receive.
-- Posted: Jan. 22, 2002