How would I treat the sale of our rental house to someone who is buying it on contract and we are receiving monthly payments which include payment of taxes and interest?

If you treat the transactions of a land contract as an installment sale, the portion of the money received for the sale that is not interest may be divided into two sections. The first section is a tax-free return of the adjusted basis in the land subject to the land contract. you can use the IRS form 6252 to determine your adjusted cost basis and gross profit from the land contract. you with installment sale income should complete and submit IRS Form 6252 when filing federal taxes for the year of sale and for two subsequent tax years. Most land contracts require the buyer to pay the seller monthly payment installments that include principal and interest. The amount of interest paid by the buyer may be a tax deduction when filing federal taxes. The amount of interest received by the seller under the terms of the land contract is considered unearned income by the IRS and should be reported on your 1040. The person reporting the interest income must include the name, address and Social Security number of the person paying or receiving the money on line 11 of Form 1040, Sch A.



For tax purposes, you selling your home via land contract also earn favorable tax treatment. The major tax benefit to you, a seller is that it's an installment sale for tax purposes. As an installment sale, you pay any capital gains taxes over the contract's length, not all at once. Also, interest income earned by you in land contract sales is taxed at ordinary income rates.
In a contract for deed, if the buyer defaults, then in most states the seller can perform a simple eviction instead of having to do a costly and expensive foreclosure, since the buyer does not own the property until all the terms of the contract to get the deed has been fulfilled. since this was rental property, you have to reduce your cost by the depreciation that was allowed or that should have been allowed.you mut recapture sec 1250 depreciation that you took previously as rental pty while you owned it.for example, when you sell the property, the portion of the gain that is attributable to depreciation is taxed at a higher rate. If the property cost you $100k, and the depreciation allowed or allowable was $10k, then the cost for measuring gain is $90k. If you sold the property for $120k, then your total capital gain under that scenario would be $30,000. The first $10k in gain, representing depreciation recapture, is taxed at 25 percent if your tax rate is 25% or higher. The $20k gain in excess of your original cost is taxed at the preferential rate of 15 percent if your tax rate is 25 or higher. If your income for the year is lower, these rates can also be lower. So if your gain is really $20k and you don't have recapture to worry about, you should set aside $3,000 (15 percent of $20k).