Will You Owe Taxes When You Sell a Mortgage Note?
Possibly. Here are the factors that decide it and the questions to bring to a CPA before you sign a purchase agreement.
Will I owe taxes when I sell my mortgage note?
Potentially yes. Tax treatment depends on how you originally financed the property, how long you have held the note, your cost basis, and whether you originally elected installment-sale treatment, and the sale can produce ordinary income, capital gain or recapture income.
JKP Holdings does not provide tax advice. Talk to a CPA who knows installment sales before you sign a purchase agreement.
The Four Things That Decide It
How you financed the sale
Many notes come from seller financing, where you sold a property and took back a note instead of cash.
How long you held the note
Holding period can affect how a gain is treated.
Your cost basis
Roughly, what you have invested in the note. The taxable amount is generally measured against it.
Installment-sale treatment
If you reported the original sale as an installment sale, you may have been spreading the gain over the years payments arrived.
Three Kinds of Income a Sale Can Produce
- Ordinary income, taxed at regular rates.
- Capital gain, which can be taxed at different rates depending on how long you held the note.
- Recapture income, which can arise when depreciation was claimed on the property earlier.
Which of these applies to you, and in what amounts, is a question for your tax professional.
Questions to Bring to Your CPA
- Did I report the original sale as an installment sale, and what happens to the gain I was deferring if I sell the note?
- What is my basis in this note?
- How would a full sale be treated compared with a partial sale?
- Does the timing of closing, this year or next, change anything?
Talk to a Direct Note Buyer
JKP Holdings has bought notes since 2010 and has transacted hundreds of them. We buy directly in 17 states and place notes in other states through our buyer network, so any state is considered. There are no upfront fees, and you get a free written offer within 24 hours.
Common Questions
Do I always owe tax when I sell a mortgage note?
Not always. It depends on your basis, how the note arose and how you reported it. Some sales produce no taxable gain, and some do. Ask a CPA about your specific note.
What is an installment sale?
A sale where you receive at least one payment after the tax year of the sale, which is what happens when you sell property and take back a note. It can let you report the gain over several years.
What does it mean to sell an installment note?
Selling the note generally means the gain you had been deferring can be recognized. A CPA can tell you how much and when.
Is a partial sale taxed differently from a full sale?
It can raise its own questions, because only part of the payments are sold. Ask your CPA how it would be treated before you sign.
Does JKP Holdings give tax advice?
No. JKP Holdings buys notes and does not provide tax advice.
