Balloon Mortgage and Taxes!

6 Replies

I found an investor for a rental property. The investor will act as the "bank" and provide the money for the investment property at maybe a 5% interest rate. Myself, the "landlord", will find a property to buy and manage the property. My question is how will the taxes work. The investor can wire transfer the money to either the seller or the lawyer directly. Will there be any taxes involved with that? (aside from the closing costs). The terms for the balloon mortgage would be 30 year fixed rate amortization table with a 10 year balloon payment. The landlord will pay the mortgage payment to the lender every month. Does the lender owe taxes to the government for the mortgage payment? Does the lender or landlord owe taxes on the balloon payment at the end of balloon mortgage? 

Originally posted by @Samuel Mutschler :

I found an investor for a rental property. The investor will act as the "bank" and provide the money for the investment property at maybe a 5% interest rate. Myself, the "landlord", will find a property to buy and manage the property. My question is how will the taxes work. The investor can wire transfer the money to either the seller or the lawyer directly. Will there be any taxes involved with that? (aside from the closing costs). The terms for the balloon mortgage would be 30 year fixed rate amortization table with a 10 year balloon payment. The landlord will pay the mortgage payment to the lender every month. Does the lender owe taxes to the government for the mortgage payment? Does the lender or landlord owe taxes on the balloon payment at the end of balloon mortgage? 

 There are no taxes on the sale of a property for the buyer. As the owner you will pay property taxes and when you sell you will pay capital gains tax on any appreciation in value. Closing costs are not taxes. 

I’m not sure why you would care if the lender has to pay taxes on the payments he receives from you. You as the buyer will not pay taxes on any of the payments you make to your lender, including the final balloon payment. 

Originally posted by @Samuel Mutschler :

Correct. I have a few interested lenders who want to know if they will have to pay capital gains taxes on the money they make from the interest or when they receive the final balloon payment. 

Your lenders will pay ordinary income tax on the Interest they receive, just like any other interest they earn from bank accounts, CD’s, bonds, etc.  They don’t pay any tax on the repayment of actual money (principal) they lent to you, just the interest  

Originally posted by @Samuel Mutschler :

Correct. I have a few interested lenders who want to know if they will have to pay capital gains taxes on the money they make from the interest or when they receive the final balloon payment. 

Your response should be 'that's a great question that you should ask your tax professional, but yes you will have to pay tax on the interest earned'. Death and taxes, they come for everyone.

@Samuel Mutschler Do you have a cpa? Most of these questions would be handled by your CPA. Depends a little bit on how the ownership is set up. Can you clarify who owns what and who’s paying what? And what is your role?

@Samuel Mutschler

You need to first understand how the ownership will be help and what relationship you have with 'the bank'

Is this a debt or equity position.
if this is a debt position and you own the property 100%, then it is more straight forward for you.