Capital Gain on Interest Only loan - Posted by dealmaker

Posted by dealmaker on April 09, 2006 at 23:31:32:

Thanks Dave; glad you had the time to answer this week. Well it won’t be LT cap gains because I’ll only have owned it for about 2 months.

I understand that the loan amount doesn’t affect the gain (normally). However in my case I’m selling for $2K down payment to buyers who only care about the monthly payment, not the cost of the home. So the loan amount IS the sales price, less the down payment. This way I get a better payout in 5 years.

dealmaker

Capital Gain on Interest Only loan - Posted by dealmaker

Posted by dealmaker on April 09, 2006 at 10:36:27:

I’m getting ready to flip on my my “owner finance” deals, I’ll have about $60K in it at sale. My buyers are always “monthly payment” types who just care if they can make the note, not what the price is.

Generally I do these on self amortizing loans with 5 year balloons but I can amp the GP if I do it on an interest only loan. I’m guessing that if I do that the only “cap gain” I’ll be reporting next spring is the down payment. The rest of it will come when the buyers refinance.

Normally I’d just ask my CPA but I know he’s a bit busy for the next week!

I figure by doing this my payoff will be bigger in 5 years, my taxes will be a tiny bit lower in the intervening years, and I can justify in my mind the “extra” money I spent making this place a $95K house instead of a $85K house.

I welcome any advice or opinions.

Thanks in advance.

dealmaker

Re: Capital Gain on Interest Only loan - Posted by question

Posted by question on April 09, 2006 at 19:15:09:

Don’t you pay the going cap gains rate that is in effect during the year that you report getting paid a piece of the principle? If the rate went from 15% to 20% in the year that they refinanced you would actually be paying a tiny bit more in cap gain taxes than if you paid only 15% on some of it. Just what-if thinking.

Also, although you have a “vested ownership interest” in the property, isn’t there a max number of sales like that you can do before being considered a “dealer”? If you qualify as a dealer, aren’t you supposed to pay all of the cap gains tax in the actual year of the sale, that is, at the point you write up the sale and the contract?

the amount of the loan has… - Posted by David Krulac

Posted by David Krulac on April 09, 2006 at 15:20:49:

  1. NO bearing on the capital gains computation.

  2. interest is taxed at ordinary rates up to 35% Federal.

  3. long term capital gains is taxed for most people at 15% MAX Federal.

  4. obviously the more money in capital gains versus ordinary income the less tax that you will pay.

  5. if your basis is $60,000 and you sell for $95,000, it does NOT matter whether your loan is:

a. ZERO
b. $60,000
c. $85,000
d. $95,000
e. $195,000

The capital gains is still the same at about $35,000 roughly not counting cost of pruchase and costs of sale.