Tax advantages for Seller who takes back a note?? - Posted by WindyCityRuss

Posted by Dave T on February 04, 2002 at 19:09:48:

There really aren’t any tax advantages to seller financing if the property is the seller’s primary residence.

Even if the property is an investment property subject to capital gains taxation, an installment sale that involves such a small note does not really produce a very significant tax incentive for the seller because the amount of taxable profit deferred to later years is so small.

If the sale is deemed to be a dealer disposition, then the seller’s entire profit will be taxed in the year of sale. Carrying financing for the buyer might not allow the seller to realize enough cash at settlement to pay the tax bill when it becomes due.

I guess you will just have to depend upon greed to induce the seller to accept your terms. The seller may be persuaded by any of all of:

  1. The opportunity to earn 12% interest on a portion of the seller’s equity.
  2. Offer the seller a quick sale at full price.
  3. If a FSBO, the seller will not have to pay a real estate sales commission.
  4. If the seller will take back a slightly larger note, you will increase the interest rate. For example, offer the seller 13% (or 14%, or 15%, or 18%) financing if the seller will carry back a note for $40K on the sale (you get $10K cash out at settlement).
  5. Offer the seller a higher price than he is asking (but lower the interest rate) if the seller will carry enough financing to make the deal work for you.

This is not meant to be an all inclusive list, but just what came to mind quickly.

Tax advantages for Seller who takes back a note?? - Posted by WindyCityRuss

Posted by WindyCityRuss on February 04, 2002 at 16:14:00:

I’m working on getting my info together in order to make some offers. I want to know what are the tax benefits to a Seller who takes back a note on a property.

For example… I find a home for sale for $150k. I ask the seller to take back a note at close for $30k w/ a payment of $666 a month for 60 months to the seller.

$666 a month for 5 years brings the total payback to $39,960.

What are the benefits (tax and otherwise) to the seller that I can site to sell my deal to him/her.

Any thoughts would be appreciated.

Re: Tax advantages for Seller ?? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on February 08, 2002 at 09:58:15:

Windy City Russ-----

This is classified by the IRS as an installment sale. Capital Gains Tax is paid on the gains as they are received by the seller. So this is a delay in taxes on the part of the gain carried back in a loan. Then, the seller gets the interest you pay on the loan for all of the loan amount, including the part that is really owed to Uncle Sam. Thus, he makes money on the government’s (not-yet-sent) money.

If the seller has done a 1031 exchange on the rest of the purchase price below the carry-back amount, there is tax deferral on all of that portion of the sales price.

A seller-carried loan may speed the sale–more buyers can qualify with less downpayment required.

Good InvestingRon Starr*******