Decoding Seller Financing Tax Implications Part 1

Nov 2, 2023 | Selling a Home, Title Group of Tennessee

Are you considering using a seller financing agreement to sell a home? It can have considerable advantages, including expanding the pool of potential buyers and generating more income from the sale. However, you must consider seller financing tax implications. Depending on the price and structure of the deal, it can have a significant impact on taxes.

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The average home sale price in Tennessee during September 2023 was $312,078. However, real estate trends can change quickly. Contact our team for title services when buying or selling a home in Tennessee.

Seller Financing Tax Implications

A seller financing agreement involves the property owner extending financing to the buyer instead of a traditional lender. While it can benefit both parties, you must know how these deals affect taxes.

Capital Gains Tax

Home sales are subject to capital gains tax. Capital gains tax applies to the profit you make from the property sale. This tax applies whether the buyer has a conventional mortgage or you use seller financing.

However, various deal structures can affect how capital gains tax may apply to profits. Capital gains tax might not apply if the home is your primary residence. However, strict guidelines exist for the home and seller to be eligible for the exemption.

A single person can get an exclusion of up to $250,000 gain on a home sale under this exemption. The exemption doubles to $500,000 for married couples filing jointly. It is important to remember it only applies to a primary residence. The exemption is not available for second homes or investment properties.

Property Taxes

Property taxes on seller financing can be complicated. When closing with conventional financing, the owner usually pays some portion of property taxes. In most cases, it is the amount to cover the part of the year you owned the property.

Depending on the seller financing agreement, property tax implications could change. For example, some deals have the seller staying on the title as legal owner during the agreement. Under this structure, the seller might be responsible for the entire year of property taxes. They might even be responsible for future years, depending on the length of the loan.

However, the buyer and seller could account for taxes in the financing agreement. There could be terms in the agreement stating one party or the other will be responsible for paying taxes.

As you can see, the tax implications can vary significantly depending on the situation. Consulting a tax or real estate attorney can help you sort through the tax issues concerning seller financing. We also encourage you to come back for part two of this post.

Tennessee Title Services

Do you need title services for a seller financing agreement? Click here to reach the Title Group of Tennessee. Our Tennessee title experts are ready to make closing on your sale easy.

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