How to Sell a House on Contract: Terms, Taxes & Default

To sell a house on contract, you act as the lender: the buyer moves in and pays you monthly, you keep legal title as security, and only after the final payment do you deed the property over. Federal law caps how you can structure that financing if you want to stay out of mortgage-originator territory, your contract has to meet specific drafting and recording requirements to be enforceable and tax-deductible, and both of you owe the IRS reports every year the deal is open.

Federal Limits on Private Seller Financing

The Dodd-Frank Act treats a person who finances a home sale as a potential “loan originator.” A carve-out protects individuals who seller-finance three or fewer properties in any 12-month period, but only if every condition below is met.¹

The loan must fully amortize. Regular payments bring the balance to zero over the term, with no balloon owed at the end.
You must make a good-faith determination that the buyer can afford the payments.
The rate must be fixed, or if adjustable, locked for at least five years and tied to a widely available index with reasonable annual and lifetime caps.
You cannot have built the home or acted as the general contractor in the ordinary course of your business.

A narrower one-property exemption exists for a seller financing a single home in a 12-month window. It bars negative amortization but does not require full amortization, so some balloon structures are workable under that rule.¹

Scale matters. If you finance more than five transactions in a calendar year, you become a “creditor” subject to the full Truth in Lending ability-to-repay rules, and you would likely need a mortgage loan originator license under the SAFE Act.² For a homeowner selling one house, that threshold is not a concern; the three-property rule and its conditions are what shape the contract.

Setting the Price, Down Payment, and Loan Terms

Start the contract with a precise legal description of the property pulled from the most recent deed, using boundary markers or plat references rather than the street address alone. From there, you and the buyer agree on the price, down payment, interest rate, and payment schedule.

Down payments on land contracts commonly run from 10% to 20%, though you can negotiate any figure. The interest rate has to stay below your state’s usury cap, and those caps vary a great deal: some states hold private loans under 10%, others allow well above that. Check your state’s limit before you commit to a number.

Watch the floor as well as the ceiling. If the contract rate falls below the IRS Applicable Federal Rate published monthly, the IRS will recharacterize part of the price as unstated interest, shifting money from capital gain into ordinary interest income on your return.³

The payment schedule should show how each monthly payment splits between principal and interest across the life of the loan. Under the three-property exemption, that schedule must fully amortize, with no balloon due at the end.¹ Under the one-property exemption, a balloon may be possible, but the structure still cannot produce negative amortization.

Spell out the consequences of a late payment. Many agreements use a grace period of 10 to 15 days before a late fee kicks in, with the fee commonly set near 5% of the monthly payment. Say clearly who pays property taxes and homeowners insurance, and require the buyer to send you annual proof so neither obligation lapses.

Standard land-contract forms are available from online document services and real estate boards for modest fees. Given how much turns on the drafting, a real estate attorney reviewing or writing the contract is worth the money. Flat-fee review commonly runs a few hundred to several hundred dollars; drafting from scratch costs more.

Disclosures You Owe the Buyer

Every seller in a contract-for-deed transaction has to provide property disclosure forms covering the home’s physical condition. Known defects such as water intrusion, roof damage, foundation problems, or faulty wiring have to be revealed. These disclosures head off fraud claims later.

For any home built before 1978, federal law requires you to disclose known lead-based paint or lead hazards and give the buyer the EPA’s informational pamphlet on lead risks. Failing to make required disclosures can let the buyer cancel the contract or sue for damages.

List fixtures and appliances that stay with the house. Built-in shelving, ceiling fans, kitchen appliances: name them in the contract so there is no later fight about what the buyer bought.

Clearing Title and Dealing With Your Mortgage

Order a title search before anyone signs. It walks the public record for liens, unpaid property taxes, or other claims that could cloud your authority to transfer the home. A standard residential search runs roughly $75 to $200, more for complicated ownership histories.

A title search catches what the public record shows at one moment. Forged documents up the chain, unknown heirs, and clerical errors in recorded deeds can slip past it. Because the buyer in a contract sale won’t get a warranty deed until the final payment, hidden title problems have a long window to surface. An owner’s title insurance policy for the buyer is a sensible safeguard.

The Due-on-Sale Clause

If a mortgage still sits on your property, this is where the deal gets dangerous. Most mortgages contain a due-on-sale clause letting the lender demand the full remaining balance if you transfer any interest in the property without written consent.⁴

Federal law protects certain transfers from enforcement, including transfers to a spouse or child, transfers into a living trust in which the borrower stays a beneficiary, and transfers triggered by the borrower’s death. A sale to an unrelated buyer under a land contract is not on that protected list.⁴ If your lender finds out and chooses to enforce, you could face a demand for full payoff and, if you cannot pay, foreclosure.

Protecting the Buyer From Your Mortgage

Even if the lender never notices, the buyer faces a parallel risk: if you stop paying your own mortgage, the lender can foreclose and the buyer loses the home despite every contract payment arriving on time. Many buyers insist on a third-party escrow service that collects the monthly payment, sends the underlying mortgage payment to your lender first, and forwards the rest to you. That gives both sides visibility that the senior loan stays current.

Insurance in a Split-Title Deal

The buyer lives in the house and holds equitable interest. You hold legal title and a continuing financial stake. One ordinary homeowners policy may not protect both sides well.

Require the buyer to carry homeowners insurance and name you as an additional insured or loss payee. The designation type matters. A standard loss payee clause only pays when the policyholder’s claim is valid, while a mortgagee-style clause creates a separate contractual right for you to collect even if the buyer’s claim is denied for a policy violation. Require annual proof of coverage, and set the policy limit high enough to cover your remaining financial interest.

Signing, Notarizing, and Recording

Everyone signs in front of a notary public, who verifies each signer’s identity. Notary fees are small, generally a few dollars up to about $15 per signature depending on the state.

After notarization, record the contract at the county recorder’s office or registrar of deeds. Recording does two important things. It creates a public record of the buyer’s interest, blocking you from selling the property again or saddling it with new liens without the buyer knowing. And it is the step that lets the buyer deduct mortgage interest on their federal return, because the IRS treats a land contract as a “secured debt” only when it is recorded or otherwise perfected under state law.⁵

Recording fees are modest and usually scale with the number of pages. Once recorded, the buyer holds equitable title and you keep legal title as security. When the final payment arrives, you execute and record a warranty deed transferring full ownership.

Tax Reporting Every Year the Contract Runs

The IRS treats a contract sale as an installment sale. Both sides have annual filing duties as long as the contract is active.

What You File as the Seller

Report your gain using IRS Form 6252 in the year of sale and in every later year you receive a payment, including years when no payment comes in, until the contract pays off or the obligation is disposed of.⁶

Each year, you figure a “gross profit percentage” by dividing total profit by the contract price, then apply that percentage to the principal received during the year to get your installment sale income. Interest in each payment is reported separately as ordinary income.⁷

If the property was a rental or business asset you depreciated, all depreciation recapture is reported as income in the year of sale, no matter how little cash you receive that year.⁷

What the Buyer Can Deduct

The buyer can deduct the interest portion of the monthly payment as home mortgage interest, but only when three conditions are met: they itemize on Schedule A, the land contract qualifies as a “secured debt,” and the home is a qualified residence. The secured-debt test requires the ownership interest to serve as security for the debt, the home to satisfy the debt on default, and the contract to be recorded or otherwise perfected under state law.⁵ An unrecorded contract fails that test, and the buyer loses the deduction.

What Happens if the Buyer Stops Paying

The contract should state plainly what follows a default. In most states, your remedy under a land contract is forfeiture rather than the judicial foreclosure used with a bank mortgage. Forfeiture is generally faster and cheaper; foreclosure means a lawsuit and court process.

A typical forfeiture starts with a written notice of default and a cure period during which the buyer can catch up and save the contract. The length of that window varies by state, often 30 to 90 days depending on how long the buyer has been paying and how much equity has built up. If the buyer does not cure, you regain full ownership and generally keep the payments made so far.

Some states give stronger protection to buyers who have paid a substantial share of the price or who have been on the contract for years. In those situations you may have to pursue judicial foreclosure instead, with the buyer entitled to potential recovery of equity. Default rules differ sharply across state lines, which is one more reason to have local counsel look at the default clauses before you sign.

1
eCFR. 12 CFR 1026.36 – Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling
2
eCFR. SAFE Mortgage Licensing Act – State Compliance and Bureau Registration System (Regulation H)
3
Internal Revenue Service. Topic No. 705, Installment Sales
4
Office of the Law Revision Counsel. 12 US Code 1701j-3 – Preemption of Due-on-Sale Prohibitions
5
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
6
Internal Revenue Service. Form 6252, Installment Sale Income
7
Internal Revenue Service. Publication 537 (2025), Installment Sales