selling investment property, held in trust

[Taxing Matters]

the argument could be made that the property will fall in value by that much. but i would say that is unlikely. although it is true that values are way high, at the moment.

Right now that's the biggest risk I see. And while some are downplaying the risk of property values falling much, properties in some areas are so expensive that most people cannot afford the mortgages needed to buy them, and the speculator investors may be caught short when the buyers coming through the door slow down significantly. That risk increases significantly if we draw into a serious recession later this year or next year. And that is a possibility. Thus, there is a real risk, at least in some areas, of significant price drops in the not so distant future. So selling now to capture the current high price you can get makes sense. If the prices fall later, you'll kick yourself for not having sold it for more when you could. Having enough equity in it to ensure that the future price won't at least put you in the red should you need to foreclose is, as you say, the best protection if you are going to carry it. I'd rather find a cash buyer than finance it myself given the uncertainty of the next year or so, but sometimes you can't always get what you want.

 

[TrustUser]

sure, i would rather have a cash buyer. but i am not gonna turn away the other. i do think the values will fall quite a bit. just not enough for a buyer to walk away from 300K ? so the amount of the down payment is extremely important to me, for that reason.

but 300K, plus that house would never be a disappointment for me. cuz if it ever dropped that low, i could just hold it. it would make a tremendous investment at that point.

i lost my crystal ball last week, so i dont know for sure - LOL

with regards to the trust, i would be distributing the net income each year. (assuming this carry back type of sale). the trust would never have a loss. the only asset it would own is the loan. so all that loan income would be distributed each year.

i am basically unsure as to how and when to distribute the capital gain. the beneficiaries will end up with some capital gains to pay. but it would always be considerably less than what the trust would have to pay.

if i go with the no installment sale, then all the gain will get distributed this year. that is fairly straight forward. if i go with the installment, then i really dont know how that works. they will almost certainly have the ability to make principal payments during the loan term. which i would then in turn distribute to the beneficiaries. part of that would be gain.

so lets just assume i sell it for a million, and have a gain of 200K. either that gain gets distributed all in the first year. or it does something else ? and i dont have any good idea just how that works ? if i have options ? and which option would be better ? other than that, i dont have any questions - LOL.

 

[TrustUser]

i was able to talk to an acquaintance who happens to be an income tax guy. if i do get into the situation of having the funds come to me in multiple payments, there only seems to be tax advantages to using the installment sales route. the biggest being i am able to use the exclusion amount each time. thanks all for the input

 

[LdiJ]

i was able to talk to an acquaintance who happens to be an income tax guy. if i do get into the situation of having the funds come to me in multiple payments, there only seems to be tax advantages to using the installment sales route. the biggest being i am able to use the exclusion amount each time. thanks all for the input

Exclusion amount? The only capital gains exclusion amount is for a primary residence, and that exclusion is certainly NOT available to be used more than once on the same sale. If you were selling your primary on an installment plan (which would be weird) then possibly it could be prorated over the installment period but again "weird".

 

[adjusterjack]

i dont have any good idea just how that works ?

Hire a tax pro to tell you how it works.

As for being a lender, do it if you want to.

 

[TrustUser]

Exclusion amount? The only capital gains exclusion amount is for a primary residence, and that exclusion is certainly NOT available to be used more than once on the same sale. If you were selling your primary on an installment plan (which would be weird) then possibly it could be prorated over the installment period but again "weird".

when the capital gains is calculated, there is a certain amount each year that is tax free (if i recall it was about 46K). i was referring to that as the exclusion amount. so if that capital gain is split over more than one year, then that "exclusion amount" is used for each calculation.

this is not a primary residence.

 

[Taxing Matters]

when the capital gains is calculated, there is a certain amount each year that is tax free (if i recall it was about 46K). i was referring to that as the exclusion amount. so if that capital gain is split over more than one year, then that "exclusion amount" is used for each calculation.

this is not a primary residence.

For several reasons in most cases it is indeed better to spread the gain over several years than it is to elect out of installment sale treatment. But that can change depending on what you expect your income over the next five year to look like.

 

[LdiJ]

when the capital gains is calculated, there is a certain amount each year that is tax free (if i recall it was about 46K). i was referring to that as the exclusion amount. so if that capital gain is split over more than one year, then that "exclusion amount" is used for each calculation.

this is not a primary residence.

On a federal level there is no "exclusion amount" or any amount that is tax free other than on the sale of your primary residence. A long term capital gain can be tax free if your overall income is low enough that you qualify for the 0 capital gains rate. That would be 40k single or 80k married. A short term capital gain can be tax free if your income is low enough that you don't pay any tax anyway.

Perhaps the 46K you are thinking about is a state exclusion?

 

[TrustUser]

For several reasons in most cases it is indeed better to spread the gain over several years than it is to elect out of installment sale treatment. But that can change depending on what you expect your income over the next five year to look like.

thanks tm, that is pretty much in agreement with what my tax preparer friend said. the income of us 3 beneficiaries is fairly stable. i dont know that i will end up selling it that way. but i wanted to see if could be open about it ? at least from a tax standpoint, it would probably be beneficial.

so if someone gives me an offer like that (which someone had specifically asked about), i am now comfortable in taking it, should other conditions exist. mainly the size of the down payment.

 

[TrustUser]

hi ldij,

For single tax filers, you can benefit from the zero percent capital gains rate if you have an income below $41,675 in 2022. this is what i was referring to. the same 40-80 in your post.

however, i was incorrect in a much bigger sense. i was thinking that i could lump off that amount of capital gains each year ? i am now reading this statement that i can only lump off an amount until i reach that 41,675 ?

so a real example. if i were to make $30,000 this year, does that mean i can only exclude $11,675 of my capital gains, before i would then be forced to pay the lowest rate on it ?

 

[LdiJ]

hi ldij,

For single tax filers, you can benefit from the zero percent capital gains rate if you have an income below $41,675 in 2022. this is what i was referring to. the same 40-80 in your post.

however, i was incorrect in a much bigger sense. i was thinking that i could lump off that amount of capital gains each year ? i am now reading this statement that i can only lump off an amount until i reach that 41,675 ?

so a real example. if i were to make $30,000 this year, does that mean i can only exclude $11,675 of my capital gains, before i would then be forced to pay the lowest rate on it ?

No, it means that in any given year if your total income (including gains) is higher than the single rate of 40k (or 41k plus) then you pay regular capital gains rates on all of your gain. It is not an exclusion. It is a way to allow poorer people to sell smaller assets without having to pay capital gains tax.

 

[TrustUser]

thanks. in that case, an installment sale offers me no benefit. the amount of gain (even if claimed all in one year) is not gonna push me into a higher capital gains bracket. but i will have to pay the low rate on the entire gain. at least now i know the rules

 

[Taxing Matters]

thanks. in that case, an installment sale offers me no benefit. the amount of gain (even if claimed all in one year) is not gonna push me into a higher capital gains bracket. but i will have to pay the low rate on the entire gain. at least now i know the rules

It may not push you into a higher capital gains rate to elect out of the installment sale treatment, but it could end up pushing your ordinary income into a higher tax rate.

 

[TrustUser]

thanks tm, if i get a big enough down payment, i will consider an installment sale. it appears as if it could be marginally helpful, regarding taxes. but at least it is not gonna hurt.