How does capital gains tax work on a rent to own purchase (rent credits).When its time to sell and the last payment is 1000 but you purchased the home for 15000 three years earlier.
As long as you dont exceed 15000 in collection in rent there is no capital gain tax? Anything over I would assume you pay the capital gains tax.
You pay tax every year on the rent (minus expenses) collected on your POH. You also depreciate the home a little bit every year thereby reducing your basis in it. This goes on for some years until you deed the home over to the tenant. Since you still have some basis left in the home, you can declare the capital loss on your taxes. The amount you collected in rent over the years really does not effect the capital loss, since you were paying taxes on it as regular income.Let me try again…Look at it this way, you rent out a POH and over time it gets so trashed that it is uninhabitable and not worth fixing. A guy gives you a $1 for it so he can scrap it. You deed it over to him and take your basis in the home as a capital loss. The rent you received on it over the years has nothing to do with your capital loss. I think that is pretty clear… Now you only have to change that sad story a little to have it fit the rent credit program, without it changing the tax situation – you deed it to the guy, not because it is trashed, but because you promised him you would do so if he rented it from your for some years, which he did and you, as a man of honor, did.
Randy. Thanks I appreciate that. I understand more clear
Randy,It is not as clear cut as that from the IRS perspective.If you lease with an option to purchase, the sale takes place at the option price at the time of the sale. However, if the option price is negligible (compared with the FMV of the home at the time of sale), the IRS will consider the transaction to be a straight sale at the time of entry because it "looked like a sale."Similarly, the IRS can take the position that if the home “was given away” at the end of the rental period, it was a sale from the beginning. I am not saying that they will, but they can. From a timing perspective, it would not make much difference, but the IRS likes to take its penalties for improper filing when it can.Howard
Hummm… but even so,when it is time to figure the gain or loss on the transfer of ownership, the income you received from the rent should not reduce the basis you have in the home since you have already paid tax on it. To do so, would be double taxation – once when you receive the rental income, and once when you transfer ownership of the home. Presumably, the home is “sold” to the tenant when you have recovered enough in rent to cover your basis in it. There is no profit in the sale and hence, no taxes should be on the income that paid for that which “looked like a sale.” Problem is taxes were paid every year that rent was collected. So the IRS may tax you on the “sale” if they wish (but the sale was a wash), but they must return the taxes that they collect that they were not entitled to.
If you paid taxes on the rental income, that would not be taxed again. The only real issue is that it may raise a “red flag” for the IRS and dealing with them is a hassle, even if the whole process is a “wash” except for timing issues.