Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, April 16, 2006.
DEAR BOB: My husband and I are avid readers of your columns. We own a townhouse that we bought as an investment. Now we are considering selling it. If we agree to owner financing and retain title until the loan is paid, can the buyers deduct the mortgage interest and property taxes on their income tax returns? –Melana W.
DEAR MELANA: Yes. The situation you describe is called a land contract sale, contract for deed, contract of sale, agreement of sale, installment land sale, and a zillion other names.
Purchase Bob Bruss reports online.
The basic idea is the seller retains the legal title until the buyer makes all or an agreed number of payments to the seller. If there is an existing mortgage, the seller uses part of the buyer’s payments to keep payments current on that mortgage.
As the seller, you remain the legal owner. The buyer becomes the equitable owner entitled to the income tax deductions.
Your big benefit is you can report the sale to the Internal Revenue Service as an installment sale, paying capital gains tax on your profit over the years you receive principal payments from the buyer. You also get to pay ordinary income tax on your interest income received.
However, I do not recommend this type of sale for either real estate buyers or sellers. The potential problem for buyers is often the seller is unable to deliver marketable title after the buyer faithfully made all the agreed payments to the seller.
The potential problem for land contract sellers, in many states, is the difficulty of getting a defaulting buyer out of the property if the buyer claims an equitable interest in it.
A better alternative is to transfer title to your buyer and carry back a mortgage or deed of trust secured by the property. Then, if your buyer defaults, you can foreclose. For full details, please consult a local real estate attorney.
NO EASY WAY TO FORCE RELUCTANT REALTY INVESTOR TO SELL
DEAR BOB: Thank you for your recent item about real estate partition sales. Three of us jointly own a home; two want to sell. The third doesn’t want to sell and forces us to pay expensive monthly upkeep on the home. The property taxes have recently skyrocketed. What is the approximate attorney fee to bring a partition lawsuit? The third party is inflexible and not approachable. –Ken C.
DEAR KEN: Sorry, I have no clue how much a local real estate attorney will charge for a partition lawsuit, especially with a difficult co-owner. Try to negotiate a fixed fee, rather than an hourly fee, which might escalate if the other owner resists.
Shop around. Ask for attorney recommendations from other local real estate investors for names of superb real estate attorneys. You will probably find a wide variety of fees quoted.
TWO MARRIAGES, TWO HOUSES, FOUR KIDS CALL FOR AN ESTATE PLANNING ATTORNEY
DEAR BOB: My husband and I each own our homes from previous marriages. We each have two grown children and need information how to list these homes in our wills. We live in my home and have never added each other’s names to our deeds. How do we handle this? –Sharel B.
DEAR SHAREL: Please consult a local estate-planning attorney. But before you do so, be sure you know what you want to do with each house after one of you dies.
Do you want each house to go to the surviving spouse? Or to your grown children from your first marriages? Be sure the attorney you consult understands revocable living trust benefits so you can avoid unnecessary probate court costs and delays.
The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar With or Without a Real Estate Agent,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).