Land Contract (Contract for Deed): How It Works and How the IRS Taxes It
A land contract (also called a contract for deed) is seller financing in which the buyer takes possession and pays the seller in installments, while the seller keeps legal title until the contract is paid off. For tax purposes it is usually a completed sale: the seller reports the gain on the installment method under IRC §453, on Form 6252, as payments arrive.
By Hans Goldstein, EA, Tax & Exit Planning · Updated
Admitted to practice before the IRS.
What is a land contract (contract for deed)?
A land contract, also called a contract for deed, installment land contract or agreement for deed, is a way to sell real estate where the seller is the lender. The buyer takes possession and pays the seller in installments; the seller keeps legal title until the last payment, then delivers the deed. No bank is involved, which is why land contracts are common for land, rural property and buyers who cannot get a loan.
For the seller, three things matter: the IRS usually treats it as a completed sale when the buyer takes the benefits and burdens of ownership; the gain is reported as payments arrive on the installment method (IRC §453, Form 6252); and the interest must be at least the applicable federal rate or part of the price is recharacterized as interest (IRC §483 and §1274, AFR published monthly by the IRS). The seller also carries the buyer's credit risk for the whole term.
How a land contract works
- Seller and buyer agree on price, down payment, interest rate and term. Terms are negotiated directly; there is no bank underwriting.
- The buyer moves in and takes on the day-to-day obligations of ownership, usually including property taxes, insurance and maintenance, as the contract spells out.
- The buyer pays the seller monthly, often with a balloon payment after a few years when the buyer refinances.
- The seller holds legal title as security. If the buyer defaults, the seller's remedy is forfeiture or foreclosure, depending on the state.
- At payoff, the seller delivers the deed and the buyer holds full title.
For tax purposes, the legal title is mostly beside the point. What matters is whether the benefits and burdens of ownership have shifted to the buyer.
When it is a sale
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If the buyer has possession, pays the taxes and insurance, maintains the property, bears the risk of loss, and gains from appreciation, the IRS treats it as a completed sale in the year the contract begins, even though you still hold the deed. You report it as an installment sale under §453, on Form 6252, exactly as you would a seller-financed sale with a recorded mortgage.
If the arrangement looks more like a lease with an option (the seller keeps the burdens, the payments look like rent, the "option price" is not meaningfully below expected value), it is not a sale, and payments are rental income taxed at ordinary rates. That is a much worse outcome, and it is decided by the facts of the contract, not by what the document is titled.
How the payments are taxed
Identical to any installment sale. Each payment splits three ways:
- Return of basis: not taxed
- Gain: capital gain, at your gross profit percentage (total gain ÷ contract price), fixed at closing
- Interest: ordinary income, at rates up to 37%
If the contract does not state adequate interest, §483 and §1274 impute it, converting part of what you treated as principal into ordinary interest income. Land contracts are written informally more often than mortgages are, so this comes up far more here than it should. Check the applicable federal rate for the month you sign.
The seller financing calculator handles land contracts the same way it handles any carried note. Put in the terms and it gives you the amortization schedule alongside the year-by-year tax.
Depreciation recapture is still due at closing
If the property was a rental or otherwise depreciated, recapture does not wait for the payments.
Unrecaptured §1250 gain (the depreciation you took on the building) is deferrable, taxed at up to 25%, and comes out of the gain first as payments arrive. §1245 recapture on personal property, appliances, and anything a cost segregation study carved out is ordinary income recognized in full in the year of sale under §453(i), whatever the down payment was.
Most land contracts come with a small down payment, since that is usually the reason people use one. That is exactly the scenario where the closing-year tax exceeds the closing-year cash. More on recapture in an installment sale.
Forfeiture, repossession, and the tax it triggers
The reason sellers like land contracts is that default remedies are often faster than foreclosure. In some states forfeiture is a summary process. The reason to be careful is that getting the property back is a taxable event.
Under §1038 for real property, you recognize gain on repossession to the extent of payments received that you have not yet paid tax on, subject to limits. You do not simply reset to your original basis and carry on. And whether your state treats a defaulted land contract as forfeiture or requires full foreclosure varies enormously. Michigan, Ohio, Texas, Minnesota and Florida all handle it differently, and several have tightened protections for buyers who have paid in substantially.
The structural problem
A land contract makes you the lender to a buyer who usually could not get bank financing, secured by a property you must go to court to recover, with a tax bill at closing that may exceed your down payment.
The §453 tax treatment is favorable. The credit position is not. A structured installment sale preserves the identical installment tax treatment while the payments are funded at closing through an assignment company and a fixed annuity from a highly rated life insurer. You keep the deferral and trade the buyer's collection risk for the credit of the assignment company and its insurer.
Frequently asked
Q: Who pays property taxes on a land contract? A: The contract decides who writes the check, and it is usually the buyer. For income tax, once the land contract is treated as a sale, the buyer is the tax owner and is the one who can deduct the property tax and the interest, even though the seller still holds title.
Q: What are the IRS rules on a land contract? A: If the benefits and burdens of ownership have passed to the buyer, the IRS treats the land contract as a sale in the year it is signed. The seller reports gain under the installment method on Form 6252 each year, reports the interest as ordinary income, must charge at least the applicable federal rate or have interest imputed under §483 or §1274, and recognizes §1245 recapture in the year of sale. A repossession is governed by §1038.
Q: Is a land contract reported as an installment sale? A: Yes, if the benefits and burdens of ownership have passed to the buyer. Report on Form 6252 for the life of the contract.
Q: Who claims the depreciation and the property tax deduction? A: The buyer, once it is treated as a sale. The buyer is the tax owner even though you hold legal title.
Q: What if the buyer defaults in year two? A: You repossess, and §1038 governs the gain on repossession. You do not get a clean reset to your original basis.
Q: Can I use a land contract to avoid capital gains tax? A: No. You defer and spread the gain, which usually lowers the total. Recapture is not deferred at all.
Q: Is a contract for deed the same as a land contract? A: Yes. The terms are regional. Bond for deed, installment land contract and agreement for deed describe the same arrangement, and the tax treatment does not change with the name.
Sources: IRS Publication 537, Installment Sales, IRS Form 6252 instructions, 26 U.S.C. §1038 (Cornell LII). State law governs forfeiture and foreclosure; talk to a real estate attorney in your state.
Find out what your land sale tax bill actually is, and what you can do about it
No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.
Find out what your tax bill actually looks like before you sell, including the parts your CPA may not raise until the return is already being prepared.
Most people find out what they owe after the sale closes, when nothing can be changed. A short conversation now tells you the number, which layers apply to your situation, and which options are still open while the sale is still in front of you.
- What you will actually owe: federal, the 3.8% surtax, recapture and your state
- Which of those layers you can still do something about
- Whether spreading the sale changes the number in your case
Hans Goldstein · 213-414-2808 · Hans Goldstein: Tax & Exit Planning · This is an educational conversation, not tax advice. Bring your CPA in before you file.
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
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The calculator runs your sale through real 2026 federal + state tax brackets and shows §453 savings vs lump sum side-by-side.
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Do you have to pay taxes on a land contract?
Yes, but usually spread out. The seller reports each payment in three parts: return of basis (not taxed), gain (taxed at capital gains rates under the installment method) and interest (ordinary income). The buyer pays no income tax on the purchase but can deduct the interest and property tax as the tax owner. Depreciation recapture under §1245 is taxed to the seller in full in the year of sale.
Who pays property taxes on a land contract?
The contract decides who writes the check, and in Wisconsin and most other states it is usually the buyer. For income tax, once the land contract counts as a sale, the buyer is the tax owner and is the one who can deduct the property tax and the mortgage-style interest, even though the seller still holds title. Check the contract and your county rules on who receives the bill.
What is the downside of a land contract?
For the seller, you become the lender to a buyer who often could not get a bank loan, and getting the property back after a default can mean forfeiture or foreclosure in court plus a taxable repossession under §1038. For the buyer, you do not hold title until payoff. A structured installment sale keeps the same §453 tax treatment while the payments are funded at closing, so the deal closes without the seller carrying the buyer's credit risk.
How is interest on a land contract taxed?
As ordinary income to the seller, at rates up to 37% federal, and deductible to the buyer if the property qualifies. If the contract states too little interest, §483 and §1274 impute interest at the applicable federal rate, turning part of what you counted as principal into interest. Check the applicable federal rate for the month you sign.
Related
- Seller financing tax implications
- Seller financing calculator
- Selling land with owner financing
- Form 6252 explained
- What is a structured installment sale
Sources: IRS Publication 537, Installment Sales; IRS: About Form 6252, Installment Sale Income; 26 U.S.C. §1038 (Cornell LII). Checked October 3, 2026.