I don’t see the difference between selling the property on an installment sale, and selling your contract on an installment sale. The profit is still ordinary income to your business, fully taxable in the year of the sale.
What is the full market value of the note you will be holding? Perhaps, you will be forced to discount your note if you were to convert it to cash immediately. For example, you purchase property for $10K, then sell for $1K cash down and a promissory note with a face amount of $21K. You contact three note dealers and learn that your note is only worth $17K if you sold it today. Ask your accountant if your taxable profit wouldn’t be based upon the $17K value of the note you took in exchange for the deed to the property, which (when added to the $1K down payment) makes your total taxable profit from this deal only $8K.
As a dealer corp, I know that I have to immediately pay the full amount of capital gains tax if I sell a property when holding a mortgage.
For example: If I buy a house for $10,000, and resell it for $22,000 with $1,000 down and $225/month with a balloon due in several years. I’ll pay taxes on the $12,000 difference between my price and the sale price this year.
But, if I do a wholesale assignment, can I loan the buyer the cash to buy the house and my assignment fee without having to pay tax on the full amount immediately? Does it matter than instead of selling a house, I’m loaning money for them to buy the house and for my assignment fee?
Here’s that example with the same numbers: I have a house under contract for $10,000, I sell my contract for $12,000 (total price of $22,000). My buyer gets the $10,000 cash from me to pay the seller, gives me $1,000 down and I have a mortgage on the property for $21,000 still owed to me. I get $225/month with a balloon due in several years.
Would I have to pay the tax on the $12,000 assignment immediately, even though I’ve only received $1,000 plus the monthly payments? Another benefit of doing it this way is that I don’t close on the house and save on closing costs.
Posted by Reggie Ritsema on November 22, 2004 at 07:15:55:
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