Buying a home on land contract is an alternative method of financing that new home you want. A land contract may be the only way you get a home if your credit is poor or you just don't think you would qualify for a traditional mortgage. A land contract allows you to purchase the home, pay for it over time and take possession of the property once the contract is paid off. If you're the seller of the property, you must furnish the buyer with a copy of tax form 1099-S.
1099-S
Form 1099-S is the tax form used to report the sale of real estate. This tax form is used when you sell a piece of property via land contract as well. The Internal Revenue Service requires that you report the sale of property on this form and give the form to the agency. When you file your taxes, you must report this sale.
Significance
You must report the sale, even when you may not have to pay income taxes on the proceeds of the property. Generally, when you receive payment from the buyer, you would report the sale as an installment sale. Any interest you receive on the loan is taxable to you as income. Any gain you receive is reported on your taxes as capital gain. You only need to report the gain as you receive it.
Effect
As long as you've properly filled out the 1099-S, you may exclude an amount up to $250,000 ($500,000 if you're married filing jointly) from your taxable income. This exclusion does not include any gain you receive, such as interest payments. You must pay taxes on that interest income.
Consideration
You may also have to help the land contract owner with the payment of taxes if this is his first time owning a home. The county where he lives should send him a tax bill. You should also make it clear what portion of the taxes he will be responsible for. This is spelled out in your land contract, but it might be helpful to go over this with the buyer.
