Using a Land contract on sale of 4-plex

[Kevin Hobbs]

I want to sell a 4 unit Rental in Decatur GA for about 1.2 million.   I have a 470k 1st mortgage at 2.5%.   gross rents are 84k/year -20k (taxes insurance, maintenance) = 64k net income.  

If i sell it for cash I will pay about 700k in capital gains at (20% capital gains rate + 3.8% investment income tax + 6% state tax = 30% tax on amount over 400k), plus depreciation recapture.  Leaving me only about 400k.

Im retiring and would like to spread capital gains over about 10 years.  Georgia has 65k capital gains/interest tax exclusion, and the first 40k of capital gains is 0% for Federal taxes.  Cap gain is 15% for 40k-200k.  Avoiding net Investment income tax starting at 200k.

My thought is to sell using a land contract , with 20-25% down, interest rate at 6%, and collect the difference on the spread of 6% vs 2.5% on my first.    Perhaps get 40k-65k in capital gains each year, plus the interest payment, then balloon in 10 years. 

I would want to insure the insurance and property taxes get paid, and that i can verify it. And also avoid liability if someone gets injured on my property, so considering an LLC.

Any thoughts on using a land contract or on reducing taxes this way?

[Bill B.]

Your numbers don’t make sense. 

1) If you bought the property for ONE dollar, and your combined tax rate was 30% you’d owe $360k in taxes. I don’t see how you could owe $700k. 

2) capital gains taxes are 0% on first $40k only if you have ZERO other income. Is that your plan? To have no income except this sale?

3) is the place falling apart? How do you have $20k in property taxes/insurance/maintenance on a $1.2mil property? Taxes of $6k? Insurance of $3k and $11k in maintenance? 

4) you’ll have to respond with what you paid for the property to get better numbers. Depending on your current housing you might be better off doin a 1031 exchange in to a better rental. Or something you could live in part of to reduce your taxes at sale. 

Reach out to someone like @Dave Foster. He’s been around here for years helping people delay their taxes, hopefully until they pass and avoid the taxes completely. Which would be another option. Take out a 400k second tax free and live off at money.