Author Topic: Seller financing and capital gains?  (Read 1441 times)

waltworks

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Seller financing and capital gains?
« on: January 23, 2025, 09:36:30 AM »
So, I did some light googling and got even more confused.

We might sell a house to the tenants living in it. We'd finance it for a year or two and then they'd pay a balloon (refi, presumably) for the rest of the money.

We're coming up on the end of our 2/5 capital gains exemption, though, so if we get the big chunk of cash 2 years down the road, is it subject to capital gains since it's out of the exemption time period? Or is the exemption based on the date of the sale?

Anyone done this? I'd prefer not to but the market is looking not great where we live and this is probably our best option to sell it (but that will depend a bit on the capital gains situation).

Thanks y'all!
« Last Edit: January 23, 2025, 10:01:53 AM by waltworks »

Archipelago

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Re: Seller financing and capital gains?
« Reply #1 on: January 23, 2025, 10:00:28 AM »
Hmm, what date does the capital gains exclusion come?

waltworks

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Re: Seller financing and capital gains?
« Reply #2 on: January 23, 2025, 10:04:13 AM »
September of this year is the end of the exemption period. I don't recall the exact date, but that doesn't really matter.


dandarc

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Re: Seller financing and capital gains?
« Reply #3 on: January 23, 2025, 10:09:46 AM »
I think it depends how you structure the deal, and if the below is true, sounds like what you want to do. Probably worth hiring an expert to be sure you do the deal correctly and get the tax treatment you'd prefer.

https://www.withum.com/resources/capital-gains-tax-deferral-via-installment-sale-agreements/

Quote
Election to Opt Out of Installment Sale Treatment

Given the factors listed above, it is important to note that a seller can elect out of installment sale tax treatment even if the terms of the transaction call for cash payments over time. Therefore, should the seller anticipate an unfavorable tax position by delaying the recognition of gain, the taxpayer is well within his or her right to pay the tax up front while receiving cash per the terms of the agreement.

Archipelago

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Re: Seller financing and capital gains?
« Reply #4 on: January 23, 2025, 11:49:28 AM »
My vote would be to work with the tenants to buy the house this year and be done with it. Offer to help them pay for closing costs by rolling them into their mortgage and giving them a seller's concession credit at closing.

If you're going to introduce seller financing to extend the deal, would probably be best to talk to a CPA.

If the capital gains bill is going to be really high and you want to avoid it, selling sooner than later would be best. You don't want to end up in hot water with the IRS. If the capital gains bill isn't that bad, it might even out if you're seller financing and make up some of the $ on interest.

sonofsven

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Re: Seller financing and capital gains?
« Reply #5 on: January 23, 2025, 11:57:49 AM »
My vote would be to work with the tenants to buy the house this year and be done with it. Offer to help them pay for closing costs by rolling them into their mortgage and giving them a seller's concession credit at closing.

If you're going to introduce seller financing to extend the deal, would probably be best to talk to a CPA.

If the capital gains bill is going to be really high and you want to avoid it, selling sooner than later would be best. You don't want to end up in hot water with the IRS. If the capital gains bill isn't that bad, it might even out if you're seller financing and make up some of the $ on interest.
This would be my vote as well. I did something similar years ago and worked with the tenant (my friend) and sold it just before the exclusion was up.
I don't remember all the details on seller financing and the cap gains exclusion, unfortunately. But I remember it was something I didn't want to deal with.