I’m not an accoutant, but my guess is that he wouldn’t be taxed on any money he borrowed against the property. If he sells it on terms after refinancing I don’t think that would create a tax due on the money borrowed just because he sold the property. His tax would be based on the sale amount of the property, period! If he sold on terms his tax would be due as he receives the payments instead of being taxed on the full amount at the time of the sale.
If you sold a property on terms and later went back and refinanced to pull some cash out, would that mean you have to pay taxes on the money you financed? I don’t think so. So why would it be any different if you borrowed against the property before you sold?
I have a seller that has a duplex. It has been in their family for a couple generations. It is paid for and each side is curently getting 300 per month. The area indicates it could go up to 400 or more per month if it was cleaned up a little.
Anyway, they like the cash flow of 600 per month and they would like to sell. Although they would love a cash sale they do not want to get whacked with taxes. So they offered financing on it. The terms are 51K sales price 10K down 41k at 8% on an 8 year note with payments at 579.61 per month, that does not include insurance and taxes. This is about what they are used to bringing in a month thats why I believe they set it up like this.
So as the deal sits it won’t really cash flow enough to make it worth while. So my question is, if I can get this guy to refinance this thing pulling out some cash, then renegotiating the terms for a longer amortization on the note to get the payments down enough for a decent cash flow, would his borrowed money still be a taxable event if he sold it on terms?
And if I could get him more cash from the refi I may not have to put as much down.
Any ideas or sugestions on this would be greatly appreciated.
If the owner refinanced there is no tax due on that amount. He has probably depreciated it completely and his purchase price was extremely low. If he sells, even on a wrap, it is a taxable event. He would have to recapture the depreciation in the year of sale. If he sold as an installment sale then the gain would be taxable as he recieves it.
If he were to refi then put it into a Pactrust then it would not be a taxable event. They would have most of the equity in cash. You would manage, have the cash flow and any future appreciation. When they wanted the the rest and were willing to 1031 or take the tax hit you would terminate the trust.