Executory/ land contract tax question
Investor · United States · Member since 2020 · 202 posts · 284 votes
Executory/ land contract tax question
Most Popular Reply
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3yQuote from @Sean Bramble:
I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes
Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔
example:
Gross STR revenue = $100k
Annual principal only pmts = 60K
Operating expenses = 20K
Net Cashflow = 20K
do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?
Nope- principal payments aren't taxed.
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
7 Replies
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Sean Bramble:
I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes
Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔
example:
Gross STR revenue = $100k
Annual principal only pmts = 60K
Operating expenses = 20K
Net Cashflow = 20K
do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?Nope- principal payments aren't taxed.
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Sean Bramble
The lender is the one who would still pay taxes on interest, even though the loan is no interest he will (when he files taxes), subject to AFR (applicable federal rate).
You of course don’t get to deduct any interest though from your tax basis
7e investments53 Reviews - Investor · United States · Member since 2020 · 202 posts · 284 votes3y
Quote from @Steve Vaughan:
Quote from @Sean Bramble:
I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes
Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔
example:
Gross STR revenue = $100k
Annual principal only pmts = 60K
Operating expenses = 20K
Net Cashflow = 20K
do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?Nope- principal payments aren't taxed.
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
Thanks @Steve Vaughan - I hear you on the risks. He’s unwilling to do a subto/ seller carry hybrid on this one, so this is the workaround. I know land contracts expose me to this risk, but are there any tactics I can use to at least reduce it somewhat?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Sean Bramble:
Thanks @Steve Vaughan - I hear you on the risks. He’s unwilling to do a subto/ seller carry hybrid on this one, so this is the workaround. I know land contracts expose me to this risk, but are there any tactics I can use to at least reduce it somewhat?
I didn't realize there was debt still on it.
I guess I would make the principal payments a while but save up a DP and buy it with a mortgage of my own within a couple years. Hopefully rates will drop, values will hold and you'll punch the balance down quickly.
- Investor · United States · Member since 2020 · 202 posts · 284 votes3y
Quote from @Steve Vaughan:
Quote from @Sean Bramble:
I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes
Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔
example:
Gross STR revenue = $100k
Annual principal only pmts = 60K
Operating expenses = 20K
Net Cashflow = 20K
do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?Nope- principal payments aren't taxed.
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
@Steve Vaughan .. just to clarify, I know principal payments themselves aren't taxed, but my question is whether I can deduct them from my rents received to reduce my taxable income? So if my rents are 100, operating expenses are 20, and principal-only payments are 60, is my taxable income 20 (my cashflow)? or 80 (my rents minus operating expenses, but excluding principal payments)?. Unsure of how depreciation comes into this equation (and if I can even claim depreciation on a land contract). Any clue?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Sean Bramble:
Quote from @Steve Vaughan:
Quote from @Sean Bramble:
I'm considering buying an STR property with a land contract (also known as an executory contract or contract for deed) with 0% interest payments … meaning each payment would be pure principal pay down. No interest expense to deduct on my taxes
Question: how is this treated for tax purposes? Would I have to pay income taxes on principal pay down? I could imagine a scenario where taxes owed could exceed cashflow if this is the case, but that doesn’t seem right 🤔
example:
Gross STR revenue = $100k
Annual principal only pmts = 60K
Operating expenses = 20K
Net Cashflow = 20K
do I owe taxes on only my cashflow of 20k, or do I owe on my combined cashflow + principal pay down of 80K?Nope- principal payments aren't taxed.
The elephant in the room isn't taxes. It's not owning the property.
Hope your seller remains solvent and not sued so his property doesn't get a new lien against it while you're making all those principal payments.
@Steve Vaughan .. just to clarify, I know principal payments themselves aren't taxed, but my question is whether I can deduct them from my rents received to reduce my taxable income? So if my rents are 100, operating expenses are 20, and principal-only payments are 60, is my taxable income 20 (my cashflow)? or 80 (my rents minus operating expenses, but excluding principal payments)?. Unsure of how depreciation comes into this equation (and if I can even claim depreciation on a land contract). Any clue?
Only interest is deductible, never the principal portion of payments.
- 3yKerry BairdPro MemberRental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votesJust get the deed. Then you own the property. Make whatever payments will work for you and the seller.
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