Section 121 exemption and owner financing

[Arash Malekzad]

Hi everyone

I have the opportunity to seller finance my house with a balloon payment due in 5 years. With high interest rates, it actually seems like a great opportunity. I’ve been living in this house for more than 2 years so I should be qualified for section 121 exemption. I was wondering if that would still apply to my balloon payment in 5 years or would I need to pay regular tax on that? Also any tips for owner financing and your experience with it is very much appreciated.

[Matt Devincenzo]

I'm no accountant, and haven't done this specifically...but I have researched some options before, so hopefully a professional in that field can confirm my thoughts. When you do an installment sale typically everyone is focused on deferring the gain to future years taxes. But there is an allowance for the tax payer (you in this case) to declare all the gain in the year of sale. Doing that would allow you to realize the full 121 exemption. The future payments would of course have some interest you'd pay taxes on like usual, but you wouldn't need to pay anything on the portion that was gain like a typical installment sale since you already declared it. 

Again that's what I'd be looking to confirm would work in this situation with your tax professional.