How to report unusual sale

[Max W]

Client owns a house in NC purchased in 2011.  He rented it for a while, but had moved to CA and wanted to get rid of it.

He made a deal, in 2015, with a RE company who offered to pay the mortgage and taxes for him and maintain the property.  

Client retains title until mortgage is paid and mortgage is still under his name.   

Whatever the RE Company pays each month I know is reportable income to the client.

Would you handle it as an installment sale (no interest) or treat the payments as rental income and depreciate?

 

 

[Lion EA]

I would start by reading the contract.

[Max W]

Thanks for the suggestion, Lion, but the contract doesn't help.  I did a little googling and a seller financed sale is a Land Contract.  A land contract gives equitable title to the buyer, which means the buyer can enjoy the use of the property.  So, I would conclude that it is an installment sale and not a rental. 

I have never had this come up on a tax return before, but I remember that in the late 70's when interest rates were so high, it was about the only way to sell property.

[Lion EA]

Not all states have land contracts, but apparently NC does, with a lot of minimum requirements:

https://www.ncleg.net/EnactedLegislation/Statutes/PDF/ByChapter/Chapter_47H.pdf

[Gail in Virginia]

If I understand what you are saying, the RE company is buying the house by paying the mortgage, taxes and maintenance expenses.  At the end of the mortgage, they will assume the title but until then the title remains with your client.  And they have a contract to this effect. 

I don't know how long the mortgage has to run but there has to be interest reported on the sale.  If none is stated,you will have to used imputed interest.  So it sounds like there is a good possibility that there is a loss on the installment sale and ordinary income from interest on the installment sale.  So that leaves the question of whether the loss is a non-deductible personal loss or a business loss on a rental property. 

[PapaJoe]

Deal was made in 2015. How was it treated on his tax return in 2015-2020?

[Max W]

7 hours ago, PapaJoe said:

Deal was made in 2015. How was it treated on his tax return in 2015-2020?

2016 was the last year the taxpayer filed and that return is not available.

Actually the deal was on a handshake in 2016, he was being paid rent prior to that.  The contract is dated Jan 1, 2017, so I am starting with that.

[Catherine]

On 7/12/2021 at 6:34 PM, MAXW said:

2016 was the last year the taxpayer filed and that return is not available.

Actually the deal was on a handshake in 2016, he was being paid rent prior to that.  The contract is dated Jan 1, 2017, so I am starting with that.

Return transcript from the IRS isn't available?