Tax On Seller Financed Lots

[Alex Booth]

I'm taking a plot of land and subdividing into 10 acre parcels to sell off with owner financing. For easy numbers let's say the 10 acre lot is $100k and I can sell each 1 acre lot for $25k financed over 5 years once divided. These are lots for mobile homes with no paved roads or city utilities.

How does this affect me from a tax perspective? Am I only taxed on income physically received or am I liable for a $150k short term capital gain if I sell these lots within 1 year?

[Michael Plaks]

Quote from @Alex Booth:

I'm taking a plot of land and subdividing into 10 acre parcels to sell off with owner financing. For easy numbers let's say the 10 acre lot is $100k and I can sell each 1 acre lot for $25k financed over 5 years once divided. These are lots for mobile homes with no paved roads or city utilities.

How does this affect me from a tax perspective? Am I only taxed on income physically received or am I liable for a $150k short term capital gain if I sell these lots within 1 year?

Your question does not have a simple answer.

Here is when it would have been relatively simple. If you were consistently buying and reselling already subdivided lots, then taxes on your profit would have been spread over those 5 years. It's still not "on income physically received" because the formula is more complex than that, but it's stretched over 5 years.

Your situation is complicated by two factors:
a. we do not know if this is a one-time deal or your regular business model
b. the fact that you are subdividing a larger lot can throw a wrench into your preferred tax treatment

So really it requires a one-on-one discussion with a real estate tax expert.