Posted by JPiper on July 13, 1999 at 09:08:31:
Not true. A sale via contract for deed is an installment sale…and is taxed as the profit portion of the principal is received. Once you’ve done an installment sale you ruled out the possibility of a 1031 exchange.
JPiper
House for sell - Posted by M M Inc.
Posted by M M Inc. on July 13, 1999 at 05:07:54:
I am wanting to sell a house to a tenant. The tenant has filed Chapter 13 a couple of months ago and can not get a loan. I bought the house five years ago for 64,000, it just appraised for 84,000.
I payed cash for the house and am now getting a first mortgage on the property. Mortgage is for74,700 and the interest is at 9%. I was going to finance the property to tenant for 85,000 and interest will be set at 10%.
How do I keep from paying taxes on the capital gains. Do I pay the Capital gains at the end of the loan or during the loan. How do I keep the house in my name for the 15 yr period and then transver the property to tenant.
Any help will be welcomed.
Re: House For Sale - Posted by Bill Gatten
Posted by Bill Gatten on July 13, 1999 at 21:06:47:
My thanks to JPiper for an excellent answer to a good question… and his mention of the PACTrust™…my life’s passion.
Here’s what a PACTrust™ would do for you:
By placing the property into a PACTrust™ in your name and naming your tenant as a Co-beneficiary, you can actually convey to the tenant 100% of exactly the same benefits he would have if he’d bought the house any other way: but without bank qualifying or Down Payment, and without Capital Gains considerations (for yourself). Also it is singularly the safest means of avoiding the potential for a lender’s triggering of the Due on Sale Clause in your loan. And…the tenant’s BK cannot attach to the property, no matter what, since he won’t own Legal or Equitable title to it (the Trustee does).
In the beginning you set the Mutually Agreed Value (at start) at, say, the $85,000 you mentioned, stipulating your “Non-resident Beneficiary Contribution (your existing equity)” to be $10,300, plus any closing costs there may be on your part (if any).
Then at the termination of the Agreement in 5, 6 or 7 years (whatever time period you would choose) the Resident Beneficiary (your tenant) has the obligation of selling, or re-financing in his own name. At that time he pays off the existing loan; and hands you your original Contribution ($10,300 plus interest and any non-recurring Closing-Costs you may have had). You can even take the Passive Tax Loss (Depreciation) during this period, since you’re the Beneficiary that holds your interest purely for income-production purposes.
In the meantime, there is no Capital Gains Consideration for you; you have not ‘sold’ the property; you have merely held it in trust and leased it out on a triple net basis (from your standpoint).
For the Resident Beneficiary (from his point of view) he has acquired a home and 100% of the tax benefits. He has all appreciation potential, principal reduction and all the other Bundle of Rights in Fee Simple Real Estate ownership? without a Down Payment and without loan qualifying (and without involvement with, or danger from, his BK proceedings). Since he is leasing and not buying (the purchase is Contingent), the BK court would likely not be involved in any manner (especially since the entire transaction between you and him is secret, private, anonymous and never recorded).
In these cases, even if you wanted the Resident to have 100 of the ownership, with no equity share later on down the line, we recommend that you grant a 90% interest to him, retaining 10% for yourself. The 10% you hold onto provides several protections and advantages. It keeps your hand in the pie (giving you 50% voting [directive] rights). It avoids full divestiture should the lender ever want to make a point of it. It prevents Property Tax reassessment (so long as you retain 50% Power of Direction. It satisfies the minimal ownership requirement of the Securities and Exchange folks. It gives you a good “Threat-Handle” over prompt payments and strict adherence (e.g., your share is forfeited at termination only if the tenant has performed to your satisfaction). Or… or you may simply want a percentage of the profit upon sale at termination.
I sincerely hope this helps.
Call or e-mail me if I can be of service (never a charge for conversation or advice…though I’m not an attorney (you’ll need your own). Though I do keep a bunch of 'em around.
Bill
Re: House for sell - Posted by JPiper
Posted by JPiper on July 13, 1999 at 09:06:01:
If you sell the house by carrying financing for the tenant, you will have done an installment sale. You will pay a capital gains tax on the amount of profit that you receive annually?throughout the life of the loan. So it’s spread out.
Keeping the house in your name (such as in a contract for deed) does not change the fact that the property has been sold. You could do a lease/option, which would delay the tax if you structure it correctly and if you don’t inadvertently create an installment sale in the process by doing a 15 year lease/option. But then it wouldn’t be a sale.
To put this in perspective?..your unadjusted gross profit is $21K. So maybe you’re looking at a tax of around $4K-$5K, spread over the life of the loan and paid as you receive it.
One other factor. Selling to a guy in a brand new Chapter 13 is not without it’s problems. First, the court is going to have to approve this purchase. Second, there’s a whole lot of examples of Chapters 13’s that cannot be completed, and are therefore converted to Chapter 7?..or in the alternative your guy would be right back into financial difficulties. All of this has the possibility to affect you.
You could do a 1031 exchange?.thus deferring the tax. But you’re going to need a different buyer to do this.
The other possibility that comes to mind is the PacTrust?.but you’ll have to ask Bill Gatten regarding this, as well as the implications for naming a co-beneficiary who is in the midst of a Chapter 13 filing?..along with the implications if the Chapter 13 fails and is later converted to a Chapter 7.
JPiper
Re: House for sell - Posted by Jimbob
Posted by Jimbob on July 13, 1999 at 08:52:09:
MM,
If you refinanced the house and took out a $74,000 mortgage, there will not be any tax owed until you sell the property as a refinance is borrowed money.
If you sell the house on a contract to your tenant buyer, you will be responsible for capital gains tax on the downpayment the buyer gives you if any. As the buyer makes monthly payments to you, you would be responsible for reporting the income and would pay “income” tax on the income on a yearly basis. You would not have to deal with capital gains tax on the $74,000 until the buyer cashed you out. As a precautionary measure when you sell the house to the tenant buyer, you should put a pre-payment penalty clause in the contract or stipulate that the buyer give you 90 days notice of their intent to sell or refinance and cash youy out, that way you can prepare to reinvest the money without having to pay capital gains tax when the cashout or re-fi happens.
Once the tenant/buyer cashes you out by whatever means, you will need to do a 1031 tax deferred exchange into another investment property, thereby deferring capital gains tax once again.
One word of caution, if you just refinanced the house and are planning on selling it on contract to another buyer, I would suspect your loan has a “due on sale” clause written into, meaning, if you transfer any interest in the property, the lender can immediately call the loan fully due and payable, check your loan documents and be careful with this nasty little clause.
Hope this helps…
Jimbob