1. Seller owns an investment house FREE and CLEAR.
2. Seller bought house 6 years ago at $350,000 as investment property.
3. Market price now $550,000
4. Seller refi's at 70% LTV = $385,000, 30 year at 5%; PMT to bank = $2067 per month
5. Seller sells house at $550,000 receiving 20% down = $110,000
6. Carries $440,000 Note on balance amount 30 years, 8%; PMT from Buyer = $3229 per month
7. Assume for now Seller manages Due on Sale situation
8. First Year Interest paid to Bank = $19,121
9. First Year Interest Received from Buyer = $35,067
10. S/L DEPRECIATION ON INVESTMENT PROPERTY FOR 6 YEARS TAKEN
11. 1ST YEAR REDUCTION OF PRINCIPAL TO BANK = $5,680
12. 1ST YEAR REDUCTION OF PRINCIPAL TO BUYER = $3,675
1. WHAT IS THE CAPITAL GAINS TO BE REPORTED THE YEAR FOLLOWING THE SALE? (ignore depr recapture to make calc easy), AND EVERY YEAR THEREAFTER (don't need a number here just the concept what/how cap gains would be calculated each successive year)
2. WHAT WOULD BE A REASONABLE INTEREST RATE FOR A NOTE IN THIS MARKET WITH A 20% DOWN? 6%, 10%, 12%?
3. WOULD IT MAKE SENSE TO CARRY A SHORTER TERM (12 -24 MONTH) SECOND IF BUYER CANNOT COME WITH 20% DOWN, SAY IS ABLE TO COME WITH 10% DOWN, AND BALANCE IS THE 2ND TD.
4. WOULD A 5 YEAR BALLOON BE WISE FOR THE SELLER WHO IS RETIRED AND HAS NO OTHER INCOME EXCEPT SOCIAL SECURITY?
5. WHAT WOULD BE A NOTE RATE TO CHARGE BUYER (WITHIN CONSTRAINT OF 2 ABOVE) FOR MAKING TJE RE-SELLING THE NOTE ATTRACTIVE IN THE NOTE AFTER MARKET?
6. WHAT ARE THE PITFALLS, ILLOGIC, BLUE SKY ASSUMPTIONS IN THE ABOVE EXAMPLE? IS IT DOABLE?
7. WHAT IS THE ROI OF ABOVE TRANSACTION?
There are too many variables here to answer the question with any sort of accuracy. Also, several of the questions depend on personal preference and risk tolerance of the investor.
Please use the numbers given. Ignore personal preference, what variables would you want addressed?
Seller sells property for $550,00, down payment received = $110,000
Seller carries note on $440,000 8% 30 years receives monthly payment from Buyer = $3229
Seller's owes to Bank = $385,000 at 5% 30 years, pays bank monthly = $2067
Seller originally bought property for $350,000
Q1. what is capital gains to be reported on the first year of sale
Q2. what is the capital gains in subsequent years
Q3. what is the total ROI on the transaction?
@SHAW ALI the capital gains tax is between 15 & 20% depending on the seller's tax bracket. Im sure you can do the math.
I should have been more specific. It is not so much the capgains rate as much as what is the capital gains to be reported. Although, the sale was for $550,000, only $110,000 was received the first year, the rest is amortized over a 30 year period, and is received in payments that includes interest and principal. So, Year 1, is the $110,000 all capital gains? Remember the basis is $350,000 ( the price at which the Seller bought the property). Or is there a formula to blend the down payment received in Year 1 and the principal received each year thereafter over a 30 year period to calculate the capital gains.
Also, I suppose the interest received each year by the Seller from Buyer's PMT payments is offset by the Seller's interest payments to the Bank on the refinanced loan, but in different sections of the tax return.
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