Kelly Bullis
Perhaps you are selling some real estate and you’re having trouble finding qualified buyers because the banking lending rates are too high (currently around 5%).
Even more, you don’t like to be aggressive in using the stock market, so many of your investments are in CDs. Current CD rates are around 4%.
Here is an option to solve your house selling problem and not lose any of the CD interest you’re used to earning and were looking forward to earning on the proceeds from the real estate sale.
First, what is an installment sale? The IRS says you have an “installment sale” when the payments for the sale are received over 2 or more years. Basically, you compute the gain on the total sale and come up with a gain percentage. (Example: Gross Sales Price is $600,000, after your original cost and costs to sell, your capital gain comes to $200,000. Your gain percentage is 33% (200,000/600,000).) Then total principal payments received every year are multiplied by the gain percentage. That is the capital gain you report for each year. Of course, there is interest charged on the installment amount, which is taxed as interest income.
So here is a scenario that might work. You have your house listed for $600,000. A buyer would be willing to take that property if you “take back paper.” (i.e., do an installment sale.) The buyer can pay $100,000 down and you “loan” them $500,000. The terms are a 30-year amortization with a five-year balloon payment at 4% (not lower than the Federal Funds Rate). Your gain on the sale comes to $200,000 after factoring in your original cost and selling costs. On top of reporting the first $100,000 down payment in the year of sale, you would also report $6,748. Your reportable gain would be the $106,748 x 33% or $35,227. Plus $22,777 of interest income. (About the same as if you invested the $500,000 note in a long-term CD at 4%.) Your tax on the gain in that first year would come to as much as $5,284. It might be less if your other income is low enough.
In the following four years, your interest income would be similar, and your reportable gain would be about $2,900 each year (the 33% of the actual principal portion of the payments you received).
Five years later, you would receive a ballon payment of $453,114. At the 33% gain rate, you would report a capital gain in that year of $149,528. Once again, at a capital gain rate of 15%, your tax would come to $22,429. Over those five years you would have earned $95,462 in interest. (About the same as if you had put $500,000 in a long-term CD.)
This also doesn’t take into consideration that CD rates are going down. You probably wouldn’t have earned as much if you had $500,000 to invest in CDs over that same five-year period.
All of this, which accomplishing your main goal of selling that real estate for the price you wanted. Now, wasn’t this a good idea?
Have you heard? Psalms 49:4 says, “I will incline my ear to a proverb. I will solve my riddle on the harp.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.