When selling a home, you may wish to use owner financing so that you can attract more potential buyers and make money on interest. If you choose to go this route, you will have to comply with some rules set forth by the Internal Revenue Service. As long as you follow the rules, it can be a worthy way to generate income.
Owner financing can take one of many forms. Depending on the arrangement, it could involve you continuing to make your normal mortgage payment then having the buyer pay you back each month. If you own the property without a mortgage on it, you may simply provide the entire mortgage for the buyer. The buyer will simply make a mortgage payment to you until the property is paid in full. By doing this, you get the purchase price and interest.
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Reporting Interest Income
When you receive interest from a seller-financed mortgage, you must report it to the Internal Revenue Service on your taxes. When it comes to reporting this type of interest, you must fill out a Schedule B. On this form, you must include information about the buyer. This requires you to include the buyer's name, address and Social Security number. The buyer is also required to do this on his tax return if claiming a tax deduction.
No Balloon Loans
When setting up an owner-financing arrangement, you also are not allowed to negotiate any balloon loan payments. In the past, homeowners could take regular payments for several years then get a balloon payment for the rest owed. With the Frank-Dodd act passed in 2010, this is no longer allowed. Instead, homeowners using seller financing have to fully amortized the loan, which means that it must be paid in regular monthly installment payments.
When selling a home through owner financing, you can potentially spread out the capital gains taxes on what you receive. Traditionally when you sell a home that is not your primary residence, you have to pay capital gains taxes on the amount in the same year. Since you are spreading out the sale of your home over several years, you only have to pay for capital gains taxes on the principal that you received that year.