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 for the portion of the payment that is profit and interest and exactly how would the out of pocket expenses (acquisition and rehab) be deducted to offset the taxable income? How is the return of principal excluded? Based on the above figures, how would that break down for the first year?

[Victor N.]

I think you may have a more fundamental problem. Unless it changed in the TCJA, the installment method is not available for gains from the sale of inventory or property held for resale in the ordinary course. Real estate acquired with the intent to flip is not a capital asset but rather inventory. That is why the gain is also ordinary income and subject to self employment tax. I am sure some of my colleagues can correct me if this changed in the new tax law (TCJA)