Property Management » Installment Sales

Capital Gains Tax Planning | Benefits of Installment Sale

Property Management Software — Fri, 02 Jan 2009 09:37:37 +0000

Turn a higher profit using installment sales. Say you sold a property for $200k that you purchased for $150k. For simplicity, assume a same-year sale and no depreciation has to be recaptured.

If selling the property using a straight sale, you would have $50k in capital gains and would therefore owe at least $7.5k in taxes. As a result, your actual profit from selling the property is only $42.5k, so you decide to do an installment sale because you want to make more profit.

Using an installment method, you collect a monthly payment of $1,300 of which $300 is the interest payment. The interest is taxable and is treated like ordinary income. Since your capital gain is ¼ of the sales price ($50k of $200k), ¼ of the $1,000 principal is treated as long term capital gain. So from the $1,300 payment:

$300 is taxable interest, treated like ordinary income
$250 is taxable profit treated as long term capital gain
$750 is return of basis and does not get taxed

After all payments are collected, you would have received $260k instead of $200k in a straight sale, and this is how the payments would be taxed:

$60k is taxable interest ($6k at 10% tax bracket)
$50k is long term capital gain taxed at 15% ($7.5k)
$150k is return of basis and does not get taxed

So using an installment method, you would pay $13.5k in taxes, and you would have made a profit of $96.5k.

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Charge Your Own Mortgage Interest | Installment Sale Capital Gains Tax Planning

Property Management Software — Mon, 01 Dec 2008 08:00:16 +0000

One method of seller financing is to hold a note for many years. For example, you sell a property to a buyer who has no down payment. He takes an 80% loan from the bank and 20% down payment loan from you. Once he pays down his first mortgage, he will pay on your note.

The major benefit of seller financing, on top of the fact that you can charge more for your property because you are holding a note for the buyer, is that you can make more money by charging a rate of interest that is greater than what banks or money market accounts will offer you.

For example, say the bank pays 3% interest, money markets pay 5%, and ten-year treasury bills pay 7%. Nowadays you can charge 9% for seller financing.

If you were to invest $100,000 today, this is how much money you would accumulate in ten years at these rates:

134,392 in bank
162,889 in money market
196,715 in treasury bills
236,736 with seller financing (Second Mortgage Note)

Clearly there is a lot more money to be made if the seller can hold a note. Imagine if you held a $100,000 note for thirty years with a guarantee of 9% yearly earnings – you would be owed $1,326,768 in return.

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Capital Gains Tax Tips | Minimize Taxes Using Installment Sale

Property Management Software — Mon, 01 Dec 2008 07:00:05 +0000

Selling property usually results in a gain for which you have to pay a capital gains tax. You can reduce tax liability associated with this capital gain using an installment sale.

An installment sale is a transaction in which at least one payment for the sale of property is received after the tax year of the sale.

Recognizing the gain over time can be more preferable, because if all gain is recognized in a single year, the seller usually has a very heavy tax burden.

Waiting to receive the income until future years when taxable liability is lower can be very beneficial.

For example, you sell a property and have a capital gain of $100,000, on which you will owe at least $15,000 in capital gains tax. Since you are retiring soon, instead of collecting all the income now and being taxed on it at a high bracket, you decide to set up an installment sale so you can collect the money when you are at a lower liability and avoid the additional taxes.

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