Seller financing - I am seller - tax, legal, is this a good idea

[Maria Bocanegra]

All,

I am hoping to get some feedback here w/ potential seller financing (I am the seller). I am a lawyer by trade and am generally not too good w/ understanding tax numbers, etc. I will try to keep it simple - any feedback or thoughts are much appreciated.

- Original purchase price $170k w/ 1031 money

- Assume I have lived in property last 2 of 5 years now

- Assume no depreciation taken (i am not certain of this i would have to check past tax returns but assume this for now)

- Current market value: $170k (unfortunately this property has not seen any gain)

- Buyer proposes the following terms:

- Purchase price: $170k (market)

- Interest Rate: TBD (any thoughts?)

- Monthly P&I: TBD (not sure on this either)

- 5 year “balloon” buyer to refi to traditional mortgage

My (seller) motives for selling: no longer want to own, want to free up cash and avoid traditional closing costs.

My questions center around (if this makes sense)

- Do i face any tax on the down payment in the assumed scenario above?

- Do i face tax on the monthly interest?

- Do i face tax on the principal payment?

- Do i do an “installment” plan versus something else?

- Have i successfully avoided any potential 1031 issues?

- Is there ideas to structure the deal to avoid as much tax as possible on any portions of this scenario?

I really appreciate all of you and welcome any feedback. BTW - also seeking lawyer referrals familiar with drafting these types of purchase agreements/contracts. Property is located in Chicago, IL.

Maria.

[Dave Foster]

@Maria Bocanegra, there's no issue necessarily with the 1031s in the past.  Just make sure you calculate all past gain as well.  Because when you sell in an installment sale you will recapture all past and present depreciation. And you will pay tax on all present and deferred gain. The installment sale only delays the payment of some of those taxes.

You may qualify for a partial exemption with the primary residence exclusion.  But this is where the past 1031s will come to roost.  When you convert a property from investment to your primary residence and it has been a part of a 031 exchange there are some additional requirements.

1.  You must have owned the property for at least 5 years.

2. You must have lived inthe property for 2 out of the 5 years prior to sale.

3. You will only get to prorate the gain between periods of qualified use (as your primary residence) and non-qualified use (as investment).  

4. You will still have to recapture all depreciation.

So the primary residence exclusion is not going to give you a free ride.  Check the taxability with your accountant.