Cap Gains - Installment sale

[Stephen1]

Washington State - we are selling a couple rental properties. Just got asked whether we would consider seller financing (we are kicking that idea around). So this evening's question is - Does receiving payments over time impact capital gains taxes? And if it does, how does it impact it?
We'll be reaching out to the CPA tomorrow but were hoping for some basic understanding this evening.

 

[Taxing Matters]

Payments received on a sale that extend longer than one tax year are subject to the installment sale rule. Under that rule, you allocate part of each payment to basis and part of each payment to capital gain. There are a lot of details to this rule, as well as the option to elect out of the rule (and thus take all the gain in the first year). Those details are explained in great depth in IRS publication 537. Also see IRS tax topic 705 for a summary of the rule.

 

[Stephen1]

"IRS publication 537. Also see IRS tax topic 705" yippee, more light reading.
Seriously though, thanks for pointing us.

 

[adjusterjack]

Just got asked whether we would consider seller financing (we are kicking that idea around).

My advice: Don't.

I'm sure that there are people who successfully do seller financing but it's a high risk endeavor. There's a reason people can't or won't get a mortgage and that's why they shouldn't qualify with you. You're not smarter than the banks that won't lend them money.

I did seller financing when I was young and stupid and got burned.

 

[davew9128]

I'm sure that there are people who successfully do seller financing but it's a high risk endeavor. There's a reason people can't or won't get a mortgage and that's why they shouldn't qualify with you. You're not smarter than the banks that won't lend them money.

It depends on who the parties are. I have a client who is a RE developer who is in and out of commercial properties all the time as he buys, rehabs, and then either rents or sells them. It's rare he ever has a loan from a commercial lender on the books. All private party interest only loans. What he does would make it far too much of a PITA to go through the underwriting process on every loan/refi/modification.

 

[FlyingRon]

Do you own these properties free and clear? There are serious implications if you have a mortgage on them.

 

[Stephen1]

Do you own these properties free and clear? There are serious implications if you have a mortgage on them.

We would require down payment equal to or greater than mortgage payoff. So would be about 30% down. Otherwise, go get regular mortgage and cash me out.