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Question: I´ve owned an income property for many years and owe nothing against it. It has become difficult for me to handle tenant issues, the maintenance and everything else that is involved with a rental business. My big concern is that I´ll owe an extraordinary amount of tax to the government if I sell the property. Do you have any suggestions on how I can sell and keep more of my equity?
Answer: You are in a fortunate position since your property has no encumbrances. There is a way to take the equity that would gave been subject to capital gains taxes and have it earn daily interest. It´s seller financing or otherwise known as a seller "carry-back." The "carried-back" principal amount is not taxed until it is paid off. Only the yearly amount of interest received is taxed.
Another benefit to a seller"carry-back" is a higher yield than if you were to put your proceeds in a savings account, CD or the unpredictable stock market. The monthly payment can provide a second income or just mad money.
The length of the loan is your option. It can be based on your personal economic need. The amortization schedule (the amount of principal and interest to pay off the debt) can be set up for 10 years, 20 years or the more standard 30 years with the payment in full date (balloon payment) of your choice.
In addition, there are benefits to the buyer ... less paperwork, no lender fees, no appraisal and even more important, no last minute surprises that usually arise in the loan process.
Of course, seller financing isn´t risk free but there are precautions that you can take to prevent a foreclosure on your property. However, a foreclosure is not the end of the world. You can always either receive the full balance due at the foreclosure sale or reacquire the property to sell for a second time.
The "Seller Financing Addendum and Disclosure" does provide safeguards. You can request notices of default and delinquency so you will know if payments are not made on time or if they are missed. You may also impose a prepayment penalty. This could be considered an "inconvenience" payment if the buyer decides to sell before the agreed upon term of the loan.
The earnest money deposit should be 10 to 20 percent ... the more the amount, the less the risk. If it´s lower than 20 percent, insist that the buyer obtain private mortgage insurance. Last, but not least, order a credit report and verify employment and income in order to make sure your buyers are capable prospects.
It is strongly recommended that you seek the advice of your tax professional to confirm that seller financing is a viable alternative for your needs.
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