Investor · Durango, CO · Member since 2008 · 163 posts · 59 votes
We have buyers for a couple rental properties we have. They are each around $250k. We are wondering how to protect ourselves in the event one or even both decide to sell or refinance in the near future, or even in the same year. Our tax bite would be horrendous!
We are thinking of putting in the purchase agreement (drawn up by a lawyer) a pre-payment penalty of 20% of the outstanding balance in order to hopefully cover the taxes we would have to pay.
If we had these in a revocable trust, would it help at all? What have you done when selling owner finance to protect in case of early repayment?
No buyer is going to agree to a 20% penalty. What would your actual difference in tax be? You’ll be paying tax on your recapture and gains as you receive monthly principal payments anyway....perhaps at a lesser rate.
Yes but you have to pay that 20% as they make payments. All you’re doing is paying the taxes sooner. And if, as we all assume, taxes are higher in a couple years, you’ll actually pay a lower rate today than in the future.
Unless they are unbankable or unable to qualify for a bank. I can’t see them agreeing to any pre-payment penalty unless you’re charging less than the 2.5-3% interest the bank charges. In which case they wouldn’t prepay unless they sold.