Posted by Lawyer Lisa on March 18, 2001 at 08:38:10:
Whether or not your proposal is legal depends on your state’s law. Most states have some interest limitations between private individuals. These limitations can be different or even non-existent in business transactions though. But you don’t really need to know the answer to this question for your situation.
Yes, the interest would save their capital gains, but it most likely creates a worse tax problem for them. Interest income is taxed as earend income using the standard tax rates. At best this is equal to the captial gains rate. At worset it is significantly higher.
Depending on how creative your sellers are and what they plan to do with the money there are ways to save all or part of the capital gains. If they are investing in real estate, of course they can do the 1031 exchange. If they will invest in most other types of investments they can do a combination charitable trust and insurance trust with a private banking relationship that will allow them to effectively double the amount they receive from their property.