Tax Implications of Seller Financing on rehabbed property

[Tim Silvers]

What are the tax implications for the seller of a seller financed property in which the seller purchased, remodeled and sold it on terms?

Hypothetical transaction with easy numbers:

1) Seller acquires property for $100K.

2) Sellers rehabs property for $25K.

3) Seller sells property to buyer for $200K via seller financing

4) Down payment $10,000.00. Loan is fully amortized. Term: 10 years, no balloon.

Specifically, how would the taxes be applied and would only a portion or all of the acquisition and rehab expenses be able to be deducted? Based on the above figures, how would that break down for the first year?

r, selling it for $100k. Buyer pays $40k down, and the rest will be paid via sellers financing at 5% interest on a 10 year note, 20 year amortizations with a balloon payment at the end.

Is it correct to assume that:

1. The $40k down is subject to capital gain on the year of closing.

2. The 5% interest is considered a regular interest income. Buyer can deduct this part. What about the portion of the payment that goes to the principal ?

3. When the balloon payment is paid, this is considered as capital gain on the year of the payment.