Seller Financing is Bad – Right?
The real solution is ‘it depends. It depends on the scenario and the parties concerned in the transaction. Let’s talk about it from the Seller’s perspective and the Buyer’s perspective. We’ll additionally speak about the investor’s attitude in each of those roles. Remember, I am an investor, no longer an accountant – please check with your very own accountant to confirm how this would apply in your scenario!
For our dialogue, assume that a residence sells for $150K and the Seller takes returned $100K as a mortgage as a part of the sale (the consumer can pay the other $50K as coins to keep this simple). The Seller owned this property lost and clean – or owed more minor than the net coins acquired. Say the note has an interest rate of 6%, hobby best payments (or more incredible), with a balloon charge of the outstanding stability in 15 years. This makes the fees identical $500 in keeping with the month – assuming most effective the interest is paid.
The Seller can lessen the amount of tax they pay at the sale. When the Seller ‘takes back paper’ on the sale, that part of the house’s fairness isn’t counted in the direction of their capital benefit. As payments are available through the years, the principal acquired in each tax duration is considered a capital benefit for that tax duration. Since our note is interest best bills, the $100K capital gain might be deferred for 15 years. This way, a seller can lower the tax they might need to pay for the residence sale – each without delay and in all likelihood as a total over time.
The Seller remains ‘connected’ to the house for the duration of time that the notice is collateralized by using the place. This can be awful if the satisfaction of the house is suspect, or the neighborhood value is declining – as the residence decays, or the defects are observed, the safety for the be aware (the place) loses cost. This can be countered by requiring a bigger down price, charging a better interest rate, or doing more Buyer qualifying. For instance, a Buyer who lives within the assets is typically more likely to maintain or improve the assets even as a non-occupying Buyer might not have the equal incentive to keep the belongings (and the renter possibly has no incentive in any respect).