In the case of an installment contract, the buyer owns the car but will not get clear title until it is paid off. An analogy can be made to buying a new car with some dealer financing. The buyer still owns the property either way, but subject to all payments being made. Whether the transaction is documented by a deed transfer at the time of the initial closing and secured by a note and mortgage or the deed passing upon final payment the tax treatment is the same. Sometimes it will be paid off at the time of the last fixed payment and in other instances it has a balloon payment for the final lump sum. Generally, there would be some money paid down from the buyer to the seller and the balance financed over time. For tax and exchange purposes they are all the same. It can be called an Installment Agreement for Deed or a Contract for Deed or Articles of Agreement for Deed. Again, there are regional differences regarding the name of that contract. The second way of documenting the transaction would entail some kind of installment contract between the parties. In some jurisdictions the security interest used may be referred to as a trust deed or deed of trust. The note would typically be secured by a mortgage in favor of the seller as a lien against the property. This note would specify the interest rate, the length of time over which the loan was amortized, and the monthly payment amount. More specifically, the first way would be documented with a promissory note from the buyer to the seller. One allows the buyer to receive title to the property at the time of closing and the other allows the buyer to take title upon payment of the last installment. Seller financing can be structured in a couple of ways. Individual or entity that owns replacement property desired by the taxpayer. In general, it will also allow the seller to report the income from the periodic payments in the year in which they are received rather than all in the year of an outright sale. In this case the seller “holds the paper” requiring the taxpayer to pay the seller over time on specified terms. This can be done for a wide variety of reasons such as the buyer cannot qualify for a conventional loan, or the economics of the deal require a lower interest rate compared to an outside lender. Seller financing occurs when a person selling real estate is willing to let the purchaser pay the purchase price over time. However, it can also come up where the taxpayer is receiving seller financing from the seller of the replacement property. Seller financing comes up most frequently where the seller is the taxpayer under an exchange, and the taxpayer is providing some seller financing to the buyer.
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