If I sell my house for $800K using a Contract for Deed and have a $500K basis and a $500K capital gains exclusion, is it permissible to report the principal payments received on a monthly basis against the $500K exclusion and not have to pay capital gains taxes?
I will assume that your use of the term "Contract for Deed" means that you are financing the sale over more than one year (you have an installment sale) and all of the burdens of ownership transferred to the buyer when you closed. As such, you have a sale that has to be reported on Form 6252 Installment Sale Income. If you look at the form, you will see that it is on Line 15 that you enter your entire Section 121 exclusion to arrive at gross profit for the sale. Your gross profit on the sale would be zero. Any number divided by zero is zero. Your gross profit percentage becomes zero. Therefore, you would not have any installment income to report in any tax year. You would have interest income to report each year.
Please note, that a recent 2014 tax court case dealt with repossession of a home sold under a contract for deed. If you have to repossess and you don't sell the home within one year, then all of the gain exclusion will be recaptured as taxable capital gain. For you professionals see Debough vs Commissioner, 142 T.C. 217,
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