Posted on: 21st Jul, 2005 03:20 am
Owner financing or carry back loan is useful because:
- It is a good source of income and helps to sell the property quickly as there is no fixed criteria for buying it.
- It becomes a good option when the property can't be financed by any means or when the owner has a lot of equity in his property but may not need the money paid by a lender at the closing of a mortgage.
- The rate of interest offered by a seller can be more reasonable than that offered by any other lender.
- If the prices in your area are high or if the sale price you aim at exceeds the estimated property-value, you can close the sale quickly by financing the entire part or a fraction of the purchase yourself.
- In case a buyer defaults, the deal ends. The seller can then keep whatever down payments and monthly installments the buyer has paid till that period, and sell the home again at its market price to another buyer.
- Since the seller can spread out gain for a long period or postpone all of it, therefore his tax liability is reduced.
Would capital gains tax be due on the entire purchase price if I carry back the loan and the buyer only pays me a down payment of 1/5 of purchase price or do I only pay capital gains tax on the amount received for the down payment. It is an interest only loan for 3 years.
Hi,
As far as I know, there is an installment method for selling properties where the buyer gets the title to the property after he makes the down payment.
The seller has to pay capital gains taxes only on the proceeds received through the down payment in that particular tax year.
Thanks,
Jerry
As far as I know, there is an installment method for selling properties where the buyer gets the title to the property after he makes the down payment.
The seller has to pay capital gains taxes only on the proceeds received through the down payment in that particular tax year.
Thanks,
Jerry
Hi,
In an installment sale, being a seller you will have to pay capital gains taxes only on the sale proceeds obtained in that tax year. For instance, if the buyer has paid 40% of the sales price in the first year, you pay only 40% of the capital gains taxes.
Being the seller, you will be paying capital gains taxes on the profit of the sale, and it doesn't matter if you get the entire sales price in one single amount or through mortgage payments for a certain loan term.
I would suggest that you consult a tax advisor regarding the maximum amount of taxes that you will have to pay.
Thanks,
Caron.
In an installment sale, being a seller you will have to pay capital gains taxes only on the sale proceeds obtained in that tax year. For instance, if the buyer has paid 40% of the sales price in the first year, you pay only 40% of the capital gains taxes.
Being the seller, you will be paying capital gains taxes on the profit of the sale, and it doesn't matter if you get the entire sales price in one single amount or through mortgage payments for a certain loan term.
I would suggest that you consult a tax advisor regarding the maximum amount of taxes that you will have to pay.
Thanks,
Caron.
Hi Gal,
I have heard that you can defer taxes indefinitely if you sell off your home that has been your primary residence for a year. Also, you can defer taxes if you shifting to a house which costs as much as the price of the previous property or more than that.
But if you are giving the buyer a mortgage, then you should be paying ordinary income taxes also and that too, on the interest you receive each year on the loan.
I have heard that you can defer taxes indefinitely if you sell off your home that has been your primary residence for a year. Also, you can defer taxes if you shifting to a house which costs as much as the price of the previous property or more than that.
But if you are giving the buyer a mortgage, then you should be paying ordinary income taxes also and that too, on the interest you receive each year on the loan.
I'm not sure what that means if my buyers want me to carry the loan?
my buyer would be borrowing most of the money, but wants me to "carry back about $30,000 --they would "own " the home, correct? My name is off the title and theirs is on?? Then what happens if they default? Do I get to "repossess" the home?
Hi justine.
Welcome to the forum.
In Owner financing the title will be on the buyer's name but he is getting the financing against your property. So you can repossess the property if the buyer defaults.
Best of luck,
Larry
Welcome to the forum.
In Owner financing the title will be on the buyer's name but he is getting the financing against your property. So you can repossess the property if the buyer defaults.
Best of luck,
Larry
so are you saying that I have a "liability" if she does not pay on her "first" mortgage to the bank?? What do you mean he is getting the financing AGAINST my property (what property) --- is my name somehow legally tied to the property we are selling? I am a little scared to do this.
Also, if I can reposess the house - do I have to assume their first mortgage? I could not afford to pay for my new house and pay for this mortgage also.
Hi Justine.
The buyer is taking out the first mortgage for what? Certainly to pay the seller ... that means to you ... right. So you are getting most of your money and rest you are giving loan to the buyer. So the title should be on the buyer's name and it will be no longer your property.
Now it will be a secured loan backed by the property. So, if the buyer fails to make the payments to you then you can foreclose and certainly the first mortgage lender will have the first right to get his money back.
Best of luck,
Larry
The buyer is taking out the first mortgage for what? Certainly to pay the seller ... that means to you ... right. So you are getting most of your money and rest you are giving loan to the buyer. So the title should be on the buyer's name and it will be no longer your property.
Now it will be a secured loan backed by the property. So, if the buyer fails to make the payments to you then you can foreclose and certainly the first mortgage lender will have the first right to get his money back.
Best of luck,
Larry
Hi Justine and welcome to the forum,
With the type of transaction you are talking about there are several things we have to look at:
First, the carry back is a “loan†you are giving to the buyer. You would be in what we call “second lien†position. Yes, if they default you can foreclose on the property; however, you will have to pay off their first mortgage before you would receive the property and/or any money.
Second, if the home owners miss payments on their first mortgage the first mortgage could foreclose and they do not need to notify you. Since, you are in “second lien†position. Even worse is they could sell the property at a foreclosure auction just to get their loan money back and leave you stuck with nothing. You would have the right to go after the homeowner but, for what they would have no money.
Owner financing is good when you are the “first lien†because worst cast scenario you can foreclose and get your money back or get the property back.
Hope this helps if not ask a question I have done several of these types of transactions. :D
With the type of transaction you are talking about there are several things we have to look at:
First, the carry back is a “loan†you are giving to the buyer. You would be in what we call “second lien†position. Yes, if they default you can foreclose on the property; however, you will have to pay off their first mortgage before you would receive the property and/or any money.
Second, if the home owners miss payments on their first mortgage the first mortgage could foreclose and they do not need to notify you. Since, you are in “second lien†position. Even worse is they could sell the property at a foreclosure auction just to get their loan money back and leave you stuck with nothing. You would have the right to go after the homeowner but, for what they would have no money.
Owner financing is good when you are the “first lien†because worst cast scenario you can foreclose and get your money back or get the property back.
Hope this helps if not ask a question I have done several of these types of transactions. :D
Is buying a home with owner finance good for a investor to do? If so, why?
My home can not appraise for what the buyers have offered us. If i carry back to them does my home still need to appraise for that purchase price? Does my home need to be completly paid off inorder to carry back?
Hi Ryan,
Owner financing is a good option for investors as it offers higher rates of return. A seller needs to negotiate an interest rate that the buyer should pay them. This interest rate should be more favorable compared to any other type of investment that the seller may have thought of.
If the seller can structure the owner financing as an installment sale, he may get certain tax benefits on capital gains. Any investor going for owner financing should consult a tax advisor for the maximum tax advantages.
Take Care
Owner financing is a good option for investors as it offers higher rates of return. A seller needs to negotiate an interest rate that the buyer should pay them. This interest rate should be more favorable compared to any other type of investment that the seller may have thought of.
If the seller can structure the owner financing as an installment sale, he may get certain tax benefits on capital gains. Any investor going for owner financing should consult a tax advisor for the maximum tax advantages.
Take Care