When you sell a house on a land contract, the Internal Revenue Service considers this a seller-financed mortgage. Because the IRS has specific tax guidelines in place for reporting taxes of installment sales, you must follow procedures to claim the sale on your income tax form. Both you and the buyer must report the transaction in a way that corroborates and validates the information or you may face penalties from the IRS.
Items you will need
- Blank spreadsheet
- IRS income tax forms
Determine the breakdown of each payment you receive from the buyer to know the exact dollar figure of interest and principal.
Record each interest payment on a spreadsheet or document for each calendar year that you are receiving payments from the buyer for the seller-financed mortgage.
Add the interest payments for the calendar year to total them. You must report this interest income on your income tax form.
Enter the total interest payments for the previous calendar year on line 1 of Schedule B of IRS Form 1040 or 1040A. If the land contract was the sale of your home and the buyer is living in the house as the personal residence, list the buyer’s social security number, name and address on the left side of Schedule B under “Interest and Ordinary Dividends.”
Provide your social security number, name and address to the buyer to enable the buyer to enter this information on line 11 of Schedule A to deduct mortgage interest.
- With a land contract, the seller retains legal title interest in the house. The buyer gets physical possession of the house and the equitable title of the property. These are important distinctions because the IRS has specific guidelines for each party in a land contract. If you opt out of the installment method, report your entire capital gain from the sale in the year you sell your house -- even though you won’t receive the entire dollar amount during that year. The capital gain to report is the fair market value of the buyer’s obligation to you in the year of the sale, according to the Internal Revenue Service.
- If the buyer and seller neglect to include the other party’s social security number on the appropriate schedule, the IRS will assess a $50 penalty, as of 2012.
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