Zero Percent Financing & Taxes
Full disclosure, I'm a CPA and this should not be construed as tax advice. Please consult your personal CPA.
I did a search on this topic and didn't see much discussion, so I figured I'd chime in. My wife and I are looking at a personal home that is specific to our wants & needs. However, the seller doesn't like our offer. So, I thought I would employ some of the "creative" financing strategies I've learned through BP, i.e. zero percent seller financing. In researching this topic, I ran across §1274, which basically allows the IRS to impute interest income to the seller (based on the federal AFR rate) whether they charge interest or not on loans that exceed $250,000, or if is the sale of their personal residence.
This had the potential to torpedo my plan since the home we're looking as is well over the $250k range. BUT, I believe we can accomplish the same goal if we use the AFR rate as the mortgage rate, then start with the acceptable monthly payment and back into the "financed price". Then add the down payment to arrive at total sale price. To ensure the seller gets all of their money, put in a 100% prepayment penalty clause in the loan.
Do any more learned members (especially other CPAs) have an idea if this could work? Are there laws against prepayment penalties for private loans?
Thanks!