Tax liability on this type of sale. Poodlebrain?

Are you in the trade or business of buying and selling houses? If so, then the house is inventory and the gain from a sale or exchange would be ordinary income. However, that is unlikely. It is more likely that you would be considered an investor, and gain from a sale or exchange would be considered short-term capital gain based on your holding period.

You would probably want to report the sale as an installment sale to match income recognition with cash realization. Each payment you receive would consist of some interest (reportable as ordinary income) and some principle determined using the effective interest method of amortizing the loan. The principle payment portion would then be allocated 4/7 to short-term capital gain and 3/7 to nontaxable return of capital.

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If the IRS ever looked at it, they would most certainly investigate the sales price.

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Why would they look at his reporting of the purchase of the property for $30,000 and subsequent sale for $70,000? As long as there are no mistakes on the Form 6252, and the interest income is being reported, the IRS would have no reason to look at the sale. Any bargain sale issues would involve the person who sold the property to the OP. That seller could have some gift tax issues.

If it is determined that the OP received a gift, then he could increase his basis in the property, and decrease his gain, by the amount of basis he inherits from the donor. It would result in the OP paying less tax.

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Are you in the trade or business of buying and selling houses? If so, then the house is inventory and the gain from a sale or exchange would be ordinary income. However, that is unlikely. It is more likely that you would be considered an investor, and gain from a sale or exchange would be considered short-term capital gain based on your holding period.

You would probably want to report the sale as an installment sale to match income recognition with cash realization. Each payment you receive would consist of some interest (reportable as ordinary income) and some principle determined using the effective interest method of amortizing the loan. The principle payment portion would then be allocated 4/7 to short-term capital gain and 3/7 to nontaxable return of capital.

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Thanks. Since I am getting hit with both the short term capital gains tax and an income tax over the life of the loan, does this deal seem good?

My ROI isn't looking as hot after considering the taxes...

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Thanks. Since I am getting hit with both the short term capital gains tax and an income tax over the life of the loan, does this deal seem good?

My ROI isn't looking as hot after considering the taxes...

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In my mind you have 2 separate transactions that you need to consider, with one being dependent on the other. First, is the 70k for the house at the current market value? If not, then you should adjust the sales price.

Second, is the interest rate reasonable for the risk you are taking on the loan?

At the end of 15 years, if no prepayment is made, you will have received 120,420 in payments. Of this amount, 30k is your original basis, and not subject to income tax, 40k is short term capital gain, and 50,420 is ordinary interest income.

From reading your post, sounds like you might be thinking that you will be hit with double taxation, but you won't.

The way the installment sale calculation works is, at the end of each year, you will allocate the total amount of payments received between loan principle and interest. The interest portion will be reported on Sch B Part I. You will list the buyer's SSN if they will be taking the mortgage interest deduction, and they will need your SSN. The principle portion will be reported on Form 6252. This form calculates the amount that will be allocated or cap gain (57.14%) versus basis (42.86%).

I assume, if you wanted to claim the full 40k gain this year you could, then you would just report the interest income annually.