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If I own a rental property that I'm currently not living in and want to sell it, I'm going to realize substantial long term capital gains (it would be 20% plus whatever my state cap gain, right?). If I sell the home as a seller financed home, how does that work for tax purposes? Do I not get the capital gain, and just report the rental interest each year? I guess I might have to report the principal paid to me as capital gain somehow.
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<< If I own a rental property that I'm currently not living in and want to sell it, I'm going to realize substantial long term capital gains (it would be 20% plus whatever my state cap gain, right?). If I sell the home as a seller financed home, how does that work for tax purposes? Do I not get the capital gain, and just report the rental interest each year? I guess I might have to report the principal paid to me as capital gain somehow. >>

You would have an installment sale and you would report a portion of each payment as gain when received. However, any depreciation you have taken on the property must be recaptured and recognized in the year of the sale even if you are using the installment method.
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If you take back a mortgage on the sale of your property, you create an installment sale. You will still recognize the full capital gain, but instead of it all being recognized in the year of the sale, part of it will be recognized each year as the mortgage is paid off (ie., a portion of the principal payments). The interest you receive each year will be reported as income on Schedule B.

Ira
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