Home sellers: Carry back mortgage and profit

Home sellers: Carry back mortgage and profit

Tue, 1 May 2007 12:00:00 GMT

Why method is recommended over land contract sale Robert J. Bruss Inman News Editor's note: Robert Bruss is temporarily away. The following column from Bruss' "Best of" collection first appeared Sunday, April 16, 2006. DEAR BOB: My husband and I are avid readers of your columns. We own a townhouse that we bought as an investment. Now we are considering selling it. If we agree to owner financing and retain title until the loan is paid, can the buyers deduct the mortgage interest and property taxes on their income tax returns? --Melana W. DEAR MELANA: Yes. The situation you describe is called a land contract sale, contract for deed, contract of sale, agreement of sale, installment land sale, and a zillion other names. Purchase Bob Bruss reports online. The basic idea is the seller retains the legal title until the buyer makes all or an agreed number of payments to the seller. If there is an existing mortgage, the seller uses part of the buyer's payments to keep payments current on that mortgage. As the seller, you remain the legal owner. The buyer becomes the equitable owner entitled to the income tax deductions. Your big benefit is you can report the sale to the Internal Revenue Service as an installment sale, paying capital gains tax on your profit over the years you receive principal payments from the buyer. You also get to pay ordinary income tax on your interest income received. However, I do not recommend this type of sale for either real estate buyers or sellers. The potential problem for buyers is often the seller is unable to deliver marketable title after the buyer faithfully made all the agreed payments to the seller. The potential problem for land contract sellers, in many states, is the difficulty of getting a defaulting buyer out of the property if the buyer claims an equitable interest in it. A better alternative is to transfer title to your buyer and carry back a mortgage or deed of trust secured by the property. Then, if your buyer defaults, you can foreclose. For full details, please consult a local real estate attorney.