Like most people, you probably think selling your mortgage note is pretty straightforward. You find a buyer, agree on a price, and sign over the deed. Easy, right?
There are a few things you need to consider before you sell, one of the most important being taxes. Here's what you need to know about the tax implications of selling your mortgage notes.
To sell your mortgage note, you must first have ownership of the note. The tax implications of selling your mortgage notes will depend on whether you sell the notes for a profit or a loss.
If you sell the note for a profit, you will be responsible for paying capital gains tax on the sale. If you sell the note for a loss, you may be able to deduct the loss from your taxes.
You should consult a tax advisor to determine the tax implications of selling your mortgage notes. Here are the different types of fees you need to consider when selling your mortgage notes.
If you sell your mortgage note within one year of acquiring it, any profit you make will be subject to short-term capital gains tax. Short-term capital gains tax is calculated at your marginal tax rate—so if you're in the 25% tax bracket, you'll owe 25% of your profits in taxes.
Any profit you make will be subject to long-term capital gains tax if you sell your mortgage note after holding it for more than one year. Long-term capital gains tax is currently set at 20%. So, if you're in the 25% marginal tax bracket, you'll owe 20% of your profits in taxes rather than 25%.
If you are in the 10% or 15% tax bracket, you may qualify for a 0% rate on long-term capital gains. On average, if you have a capital gain from the sale of other assets, you will generally be taxed at a maximum rate of 15%. However, a qualified accountant will be the best person to help you gauge how much capital gains tax you need to pay.
If you have a loss on the sale of your home, you may be able to deduct it. If you sell your home (and are using a mortgage note to do so), you may exclude up to $250,000 of the gain from your taxes or up to $500,000 for married couples filing jointly.
In some cases, you may also be subject to what's known as a recapture tax. This usually happens when you sell a property for more than its original purchase price, which can be attributed to depreciation deductions you took while you owned the property.
The recapture tax is levied at a rate of 25%. So, if the difference between the sale price and the original purchase price of your property is $10,000, and all of that $10,000 can be attributed to depreciation deductions, you'll owe $2,500 in recapture taxes.
Once you've sold your mortgage note, the first thing you need to do is file your taxes. You can do this by yourself or with the help of a tax professional. If you don't pay your taxes after selling your mortgage note, the IRS can also charge you a late payment penalty.
The penalty is 5% of your unpaid taxes for each month or part of a month that you don't pay, where the maximum penalty is 25%. In addition to penalties, the IRS will also charge interest on any unpaid taxes. The interest rate is determined quarterly and is equal to the federal short-term rate plus 3%.
When selling your mortgage notes, always work with a reputable mortgage note buyer so that you can get a fair sales price. Once you get the sales amount, pay your taxes to avoid the inconvenience of penalties.
We Buy Loans Fast is a mortgage note buyer you can trust. We will give you a fair, all-cash offer for your loans that you can close in as fast as two weeks. Get in touch for a free, no-obligation consultation.