Tax Considerations When Planning a Land contract

Can I Deduct Property Taxes - Tax Considerations When Planning a Land contract

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Tax can have a major impact on your rental property's bottom line. Do not overlook tax implications when planning for owner financing deals, like a land contract (a.k.a real estate contract, or contract for deed).

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Can I Deduct Property Taxes

The legal title is not recorded or transferred until the buyer fulfills the contract's obligations normally a few years from the Closing. However, your property is considered sold, in Irs rules, when a real estate contract is signed.

From the seeder perspective, the capital gains (if any) would be recognized as an installment sale and would be recognized proportionally as the needful payments are received. As a seller, you cannot depreciate the property, and cannot engage in a 1031 exchange at the final sale. You would record interest revenue 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 through installment sale if you have a ample gain and are not considering 1031 exchange. However, you will lose the ability to take depreciation and mortgage interest deduction. Evaluate considered your tax situation before choosing on your best strategy - Be it Long Term Lease To Own or Real Estate Contract. Always consult a tax professional for your personel situation.

The buyer in a land contract can deduct the interest and tax portion of his payments from his revenue if he itemizes, and in the case of an investor who uses the property for business, can deduct any expenses connected to the property, and can depreciate the property and any improvements he adds.

A up-to-date hot topic is that if the buyer of a real estate contract 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 seeder financing arrangement, then the taxpayer can claim the prestige even though the seeder 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 secure legal title upon full payment of the buy price,

3. The right to invent improvements,

4. The enforcement to pay property taxes,

5. The risk of loss,

6. The accountability to insure the property, and

7. The duty to pronounce the property.

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