1031 exchange owner arry financing tax treatment

Dear 1031x.com If I were to owner finance a rental property being sold, How  does the capital gains tax work,  is it paid on the down payment only or  on the total sale price of property? And what about the principle that would be paid during the year, how would  it be taxed? 

 

Dear Jim:  Your question is answered in IRC section 453.  When you sell a property and carry back the financing you usually receive payments of principal and interest.  The interest is taxed like all interest received from all sources.  The principal portion will be divided into three pieces and will be taxed differently on each piece.  Each principal payment will be treated as 1) return of capital, 2) long term capital gains, and 3) recaptured depreciation.  #1 will not be taxed, #2 will be taxed at a certain rate and #3 will be taxed at a different rate.  I hope that this helps.  Remember doing owner carryback financing severely limits your ability to do a 1031 exchange.  Please contact us for further elucidation.  Sincerely,

Steve Hickox
Attorney / President

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