Friday, November 25, 2011
Seller Financing - Now's the Time
Finding it hard to sell your real estate at a "reasonable price" (whatever that means)? Consider carrying back so-called Seller Financing. The benefits can be stellar. You will defer the payment of the majority of your capital gains tax. The cash downpayment that you receive is comprised of return of a portion of your cost basis and the rest will be capital gain. The same goes for the principle portion of the mortgage payments that you receive from your purchaser. (This is simplistic, but you get the idea...consult your tax expert.) The interest portion of those payments will be treated as ordinary passive income, but you have some control there as well by charging the lowest possible interest rate that you can (don't go below the IRS's imputed rate though) in exchange for a higher selling price (which will be taxed at capital gain tax rates ONLY WHEN YOU RECEIVE IT)! This type of sale also gives you the benefit of having a safe place to invest the sale proceeds at a rate of return that is set by you. There are several ways to make sure that your loan doesn't go bad and wind up becoming a liability. A few of those ways include making the buyer maintain a real estate tax escrow with you, providing you with certificates of insurance and actually inspecting your collateral once or twice a year to make sure that it is being maintained (and making it an event of buyer default if it is not). If your property is free and clear, then seller financing is a no-brainer. If your balance is a small one, then just require a downpayment from your buyer that covers your loan balance payoff and other costs of sale. If your loan balance is not small and the loan has due on sale provisions (alienation acceleration) then go in a talk to the lender about your plans. You may be surprised at their relief in hearing that they are not about to get back yet another property!