House purchased for home for Son

Forum|Forum|4 years ago
April 11, 2022
1 reply
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I am a retired parent and purchased a home in 2020 for the purpose of selling it to my Son on a contract for deed, as his credit did not allow him to purchase the home directly. To get the funds for the purchase I took a 2nd mortgage on my house (which was paid for).

I then sold the home to my Son for the same price I purchased it, and at the same interest rate I am paying - 2.87%. He has been making monthly payments to me starting in April,2020, the price of the house is $240,000.

Questions -

What, if anything, do I need to report in my 2021 tax filing?

What, if anything, do I need to provide my Son for tax purposes?

In Minnesota, we have a property tax refund and my Son should be eligible - he is paying the property tax to me and I pay the county. What do I need to do here?

I know this is a lot to ask, any help I can get would be appreciated.

Pat

Not A Product Question

Best answer by ColeenD3

Ok - I went to the "add more sales" option in Stocks, Mutual Funds, Bonds, Other" and the options are not the same - I am using TurboTax Deluxe. Is there another way to enter this data?

The purchase price and cost are the same - $240,000.

The interest I received form the contract for deed sale in 2021: $5,074.52

The interest I paid in 2021 on the 2nd mortage I took out to purchase this house: $5,863.16

Pat

You will need Premier to enter the sale. The interest is entered like any bank interest would be.

While the house was your second home, you can deduct the mortgage interest on Schedule A, as long as you are under the limit.

ColeenD3

You are selling a home in installments. File form 6252. Since you did not sell at a gain, it will be a wash. You have the choice to report the payments over time or to take the sale this year.

According to the tax law this would fall under the rules for installment sale. You are required to report gain on an installment sale under the installment method unless you "elect out" on or before the due date for filing your tax return (including extensions) for the year of the sale. The year of sale is the year the contract was entered into.

This is an Installment Sale.

When you sell something for more than you paid for it, you report the income on your taxes for the year in which the sale took place. Sometimes, though, the buyer spreads the payments out over more than one year. In that case, it’s what the Internal Revenue Service (IRS) refers to as an “installment sale.” Taxpayers use Form 6252 to report income from installment sales.

Form 6252 helps you figure out how much of the money you received during a given tax year was a return of capital, how much was a gain and how much was interest.

When you fill out Form 6252, TurboTax will automatically carry this year's portion of the gain to the appropriate form. It will also carry the interest portion that you entered to Schedule B and a Seller-Financed Interest Statement for Filing.

If the bank account that held any Installment payments paid any interest on the money held in that account during the year, that will be a separate 1099-Interest entry.

Just in case, here's how to enter Form 6252:

Open (continue) your return in TurboTax, if it's not already open.
In the search box, search for 6252 and then click the "Jump to" link in the search results.
Follow the prompts. TurboTax will create your Form 6252.

2017-01-02An installment sale, for tax purposes, is the sale of property paid for by installment payments that span more than 1 tax year. The installment method of reporting taxes was enacted by Congress so that taxpayers can pay taxes on the sale or other disposition of property over time, when the payments from an installment sale are actually received. Without the installment method, the taxpayer would have to report a large gain even though most of the proceeds of the sale have yet to be received, because the gain would otherwise have to be reported in the year of disposition. However, losses cannot be deferred using the installment method. The applicable tax rate that is applied to any gains depends on when the payment was received, not on the sale date. Any depreciation claimed on the property must be recaptured and reported in the sale year, which will be taxed at the rate that applies, depending on the type of property. The recaptured depreciation is then added to the basis of the property to calculate the capital gain, which will be taxed at the capital gain rate.

rydjorAuthor

Thank you for the reply to my question. I followed your directions to fill out form 6252 in TurboTax, but it said that if there was no gain (I sold the house to my son at the same price and interest rate I paid for it in 2021), that I could not use from 6252. Do I need to file something else?

Pat

ColeenD3

Yes. You can report all the "gain" in 2021. Enter it as a sale of a second home. You will need to continue to enter the interest paid to you.

You are required to report gain on an installment sale under the installment method unless you "elect out" on or before the due date for filing your tax return (including extensions) for the year of the sale. The year of sale is the year the contract was entered into.

TurboTax Online

Click on Federal > Wages & Income
In the Investment Income section click on the Start/Revisit box next to Stocks, Mutual Funds, Bonds, Other. If you have already entered some investment sales, you will see a screen Here's the investment sales info we have so far. Click on the Add More Sales link.
If you haven't yet entered some investment sales, you will see a screen Did you sell any investments in 20XX? Click the Yes box.
On the screen, OK, what type of investments did you sell? mark the Other box and click Continue.
When you get to the screen, Now we’ll walk you through entering your sale details enter the details of the sale. You will be able to select the type of investment in the first box (second home, land, etc.)
Enter the requested information and click Continue when done.