Posted by JHyre in Ohio on December 02, 2002 at 18:59:59:
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Seller Financing and Capital Gains - Posted by David Brandt
Posted by David Brandt on December 02, 2002 at 15:17:12:
When are Capital Gains Taxes paid in Seller Financing Transaction such as this:
i.e.- Commercial property with a $500,000 basis which has been owned by seller for 11 years. Current Value and Sale Price $1,000,000. Sale terms: Down Payment $150,000. Seller carry terms 7%, 20 years due in 10.
How do I calculate tax consequences, and thereby, the potential benefits to carrying paper for the seller? Specifically when does the seller pay the capital gains taxes when he is receiving only $150,000 down. What if the seller only wanted “interest only” on the $850,000 carry back. When would capital gains taxes be due? Any comments would be appreciated. Are there any resources which you suggest where I can research this in more detail? Thank you in advance.
Re: Seller Financing and Capital Gains - Posted by ray@lcorn
Posted by ray@lcorn on December 02, 2002 at 16:48:37:
David,
The installment sale tax rules would apply to your scenario. Tax will be due on the portion of the sale price received at the time of sale ($150,000), and if the note is amortized the principal portion of the payments would be taxed at the cap gains rate as received and the interest taxed as ordinary income. If the note is interest only, the interest would be taxed as ordinary income and the cap gain when the balloon is paid.
For more specific and detailed advice, post this question on the Legal Forum here on this site. See the menu at the top left of the newsgroup page, look under “Community” and then the link for “Real Estate Law”. John Hyre is the host, and one of the best RE tax minds I know… and if you tell him I said so he might answer your question! (that’s a joke John!)
ray
Re: Seller Financing and Capital Gains - Posted by David Brandt
Posted by David Brandt on December 02, 2002 at 18:03:52:
Hi Ray, Thank you very much. Follow up question. Using a 20% capital gain tax rate and my previous scenario how much of a tax would you estimate would be due in the tax year of the sale? Would you have to pay Capital Gains on the full “gain” of $500,000(@$100,000) or just $30,000 because the down payment was 30% of the “gain” or $15,000 because the down payment was $150,000 or 15% of the total sales price of $1,000,000. Thank you Ray. This is the first time I have used your website. Very interesting and helpful. Have a good day and I look forward to hearing back from you.