Updated about 14 years ago on . Most recent reply
IRS, Owner financing, and simple interest
Looks like the IRS dictates that the seller who sells on terms has to declare the minimum rate (I believe it varies but is around 3%). Which means that if you ask for and get a principal-only mortgage, the seller is going to have to pay income tax on interest he didn't receive, correct?
BUT... this got me thinking... Can't you offer 5% SIMPLE interest? So the $360,000 30-yr loan @ 5% simple interest would cost you $1,050 PI/month (360,000 / 30 years = 12,000. 12,000 x 1.05 / 12 = 1,050/mo payment - is this math correct?). Vs. financing @ 5% compound interest rate $1,932 PI/month.
Win-win-win for everyone involved: seller gets higher rate than bank's CD, buyer is saving almost 1k a month, and the IRS gets it's portion off $600/year interest.
Thoughts?....
Most Popular Reply
Also, by nature almost all mortgages are simple interest. Compound interest means you are making (or being charged) interest on your interest. There were a few of these back in the subprime mortgage days, but I believe they are a thing of the past now. They may even be illegal.