Owner Financing

[TexasBred]

CUZ, car dealers are selling and financing cars interest free everyday.....some even for farm use. Mobile home dealers are selling mobile homes and financing them "first year interest free'?? What's the difference? Can I deduct "implied interest" on my new farm truck or my new "home on wheels" even tho none was charged?

Avoid Imputed Interest:


First, imputed interest and all the crazy imputed income and gift tax problems generally do not apply when a loan totals no more than $10,000. However, watch out for this: The $10,000 limit applies to all outstanding loans between you and the lender, including those charging interest. But if the $10,000 rule does not help, you can turn to the $100,000 rule.

The $100,000 rule applies when the aggregate balance of all outstanding loans (interest-free or otherwise) between you and the lender is $100,000 or less. For income tax purposes, the amount of imputed interest is zero if the borrower's net investment income for the year is no more than $1,000. (Net investment income, which includes interest, dividends and certain royalties, but not necessarily capital gains, is the figure used to determine how much margin-account interest can be deducted on Schedule A.) Since most people who borrow money from family members are probably not sitting on large investment portfolios, imputed interest can generally be avoided.

Under the $100,000 rule, when the borrower's net investment income exceeds $1,000, imputed interest is limited to the actual amount of investment income. Here is an example: If a mother lends her daughter $100,000 interest-free but the IRS sets an interest rate of 5 percent, then the mother would have to declare imputed interest payments of $5,000. But if the daughter's investment income is less than $1,000, the imputed interest would be zero. If the daughter earned $1,500 in interest income, the mother would have to pay taxes on only $1,500 rather than $5,000.

To qualify for the $100,000 rule, the lender must collect an annual statement that discloses the borrower's net investment income.

 

[Arnold Ziffle]

Nice cut and paste job from some article about gift loans,Tex. But you (and the article?) forgot to reference the part of IRC Section 7872 that provides that the $100,000 exception is for "gift loans", i.e. a "below market loan where the forgoing of interest is in the nature of a gift" (although the article does have a mother-daughter loan example). Almost without exception gift loans are loans between family and close friends who make "gifts" because of the familial or friend relationship and not between the typical unrelated land buyer & seller.

As to your earlier post about muddying the water with something that is questionable at best --- well, I guess I'd just say that: It's the law, and it's specifically provided for (required) under various provisions of the Internal Revenue Code. Do many taxpayers, both sellers and purchasers, ignore the imputed interest rules simply because they are blissfully ignorant of the rules? Of course they do! Do most of the ignoring sellers get caught by the IRS? No, they dont; very few returns are even audited by the IRS. Should most sellers take advantage of the tax law and help themselves to a tax deduction that is perfectly legit? Of course they should, unless they are such patriots that they want to pay more tax to the IRS than the law requires. :roll:

My original comments were directed to BTR in the hope that I could perhaps help him or her save some taxes, not to get into a peeing contest with anybody. At any rate, I'm out of here on this topic. Ya'll have a great weekend. Should be clear & sunny and in the mid seventies to low eighties in Texas, so enjoy.

 

[LimiMan]

I think it's pretty much a given that with owner financing the price is always inflated a bit. That's the only way they can give you favorable financing and in some cases it's the ONLY financing available for one reason or the other. Done properly it works to the benefit of both parties.

I'd think it would be hard to take any kind of deduction for so called implied interest when the note declares there is no interest charged. If you deduct it she better report it as income.

Glad you're debt free :clap: :clap: :clap: That's everyone's dream.

The guy wants 1200 an acre if he carrys the note, if I was to get my own financing through a different lender, the price is 1500 an acre. It seems to me, the seller would rather carry the note instead of getting a lump some amount. He just sold some land in Missouri for around 2-3 million. This farm has been in his family for over 100 years and he has never even been there, he lives out of state. I know more about it than he does, he has leased it to the same guy for over 30 years.

 

[skyline]

I would jump on the owner financing like a new trampoline. OK, actually I wouldn't jump on a new trampoline but I would the owner financing. I bought some land a few years ago and we owner financed. It worked out well. We did quarterly payments, which worked out to be more convenient for me.

 

[Wewild]

It seems to me that there are no laws that allow a bank to make more money on a loan than one extended by an individual. He or she live in their tax bracket every day just like the banks.

 

[TheLazyM]

I'm buying 2 parcels side by side [15 acres][6 acres] owner finance. It does'nt matter if its your best friend you get a title search. your friend could have been left the land or even bought it and something could have been over looked. Its not going to matter whoes mistake it is your going to lose. Get it survayed just so you know what is what, and you dont find yourself in the future saying "I thought....."

 

[TexasBred]

Mr. Ziffle, nobody here wants to get into a peeing contest I assure you. But we can reserve the right to an opinion or disagree. I'm sure you are quoting IRS regs. and that's fine. I can respectfully disagree with you and IRS and we'll discuss it at any audit that may come up. I can only speak for myself but if you financed my place with zero interest I wouldn't even think of claiming an interest deduction from the transaction to save me a few bucks. It would have the potential of doing more harm to you than me.

 

[Brute 23]

Has anyone on here had any dealings with purchasing land and the owner carrying the note? Pros/Cons
He's offering a better interest rate that I could get anywhere else and only wants around 6% down.

What rate is the owner offering? Interest rates are at an all time low. They just dropped it again the other day.

It can be good as long as you make sure to cover your tail from every way and then some. There are people out there who make these deals with no intent of actually turning the land over. They will let you pay for a good while then do what ever they can to prevent the title from changing hands. It does happen. :?

Use a good realtor/ REALTOR and lawyer to help. They should be able to give good advice and see that every thing is on the up and up; title, survey, ect...

 

[Brute 23]

hmmm....I'm just curious if the legal documents executed at the time of purchase actually gave the seller/financier the authority to do these things or if he just bluffed a nice couple who were uninformed and unrepresented into thinking he could do this. Course these shady characters don't miss too many tricks. Since they already spent this much money I'd spend a bit more and have a good attorney look over my deed of trust and note and make sure I hadn't been snookered. Just my 2 cents worth.

If no realtor/ REALTOR is used and uses the promigated forms/ contract, you can use a napkin to make a contract to sell land. As long as both parties signed it. Lawyers could also be drawing up these special contracts for the "bad guys" to use when they owner finance.

That is in Texas, not sure about other states.

 

[Brute 23]

Be carfull about taxes too. If you sell somthing owner financing then the total of every payment is income and is taxed as such. It considered rent to the IRS.

That is a two way deal also. It can apply to the buyer also since you don't get the title in your name until it is totally paid for.

 

[backhoeboogie]

Make sure you get, I think its called Title Insurance. They search the title and make sure the owner is the owner. Some property is owned by several family members, some have leins on it, and some is not payed off as to speak.

That's good advice. Always get an owner title policy. I've neve had any problems but you hear horror stories.

There are also the cases where the owner you are paying passes on and now the estate owes you the land that you are paying on. You'd best have it all in writing if you get in this situation.

 

[TexasBred]

hmmm....I'm just curious if the legal documents executed at the time of purchase actually gave the seller/financier the authority to do these things or if he just bluffed a nice couple who were uninformed and unrepresented into thinking he could do this. Course these shady characters don't miss too many tricks. Since they already spent this much money I'd spend a bit more and have a good attorney look over my deed of trust and note and make sure I hadn't been snookered. Just my 2 cents worth.

If no realtor/ REALTOR is used and uses the promigated forms/ contract, you can use a napkin to make a contract to sell land. As long as both parties signed it. Lawyers could also be drawing up these special contracts for the "bad guys" to use when they owner finance.

That is in Texas, not sure about other states.

Brute, very very true. A lot of owners haven't a clue what they're signing and really don't care. They just want to own some land and some unscrupulous attorney will always put into a deed of trust whatever the lienholder wants.

 

[ownerfinancedloans]

When part or the entire purchase price, less the buyer's down payment is carried by the seller, the seller is providing owner financing. It doesn't matter if the property has an existing loan, except to the extent that the existing lender might accelerate the loan upon sale due to an alienation clause. Instead of going to the bank, the buyer gives a financing instrument to the seller as evidence of the loan and makes payments to the seller.
If the property is free and clear, meaning the seller has clear title without any loans, the seller might agree to carry all the financing. In that instance, the buyer and seller agree upon an interest rate, monthly payment amount and term of the loan and the buyer pays the seller for the seller's equity on an installment basis.



http://ownerfinancedloans.com

 

[TexasBred]

When part or the entire purchase price, less the buyer's down payment is carried by the seller, the seller is providing owner financing. It doesn't matter if the property has an existing loan, except to the extent that the existing lender might accelerate the loan upon sale due to an alienation clause. Instead of going to the bank, the buyer gives a financing instrument to the seller as evidence of the loan and makes payments to the seller.
If the property is free and clear, meaning the seller has clear title without any loans, the seller might agree to carry all the financing. In that instance, the buyer and seller agree upon an interest rate, monthly payment amount and term of the loan and the buyer pays the seller for the seller's equity on an installment basis.


http://ownerfinancedloans.com

If I'm buying it from him HIS equity better be 100%. Please explain "It doesn't matter if the property has an existing loan, except to the extent that the existing lender might accelerate the loan upon sale due to an alienation clause". (That usually means DUE ON SALE") That outstanding lien would be a 1st lien and being the superior lien could also be foreclosed at a latter date leaving the buyer with the "owner financing" out in the cold. Is this the way you do owner financing?? If the buyer made aware of the outstanding 1st lien and the possible problems??

The only way to do owner financing is for both buyer and seller to approach it as if the buyer was getting 3rd party financing; let a qualified real estate attorney take care of all the disclosures, ordering title information, surveys, clearing clouds on the title,(paying off existing liens), document preparation and closing and if either side has any hang up with any of this the deal is off. Too many deals are killed by one side or the other trying to hide something from the other.

 

[Douglas]

Something that needs to be said from the seller's perspective is prepayment. If the seller is utilizing the installment rules to reduce their tax burden they need to make sure there is a prepayment penalty clause in the note. As an example, I had a farming friend a few years ago sell property to the church next door. Since he had owned the property for many years and the land appreciated significantly, practically the entire sale proceeds were taxable. He was also retired and had little annually taxable income otherwise. He financed the sale to the church to spread his profits over several years based on my recommendation. He did not follow my suggestion that he not allow the church to pay off the note early. As expected the church decided to build on the land and needed new financing which paid the farmer off early. That of course resulted in a big tax bite which could have been easily offset with a prepayment penalty. I even suggested he talk to the church about replacing the note with a second mortgage or some other arrangement, but he was afraid to upset the church folks.

 

[TexasBred]

I'd never "knowingly" sign a note with any kind of prepayment penalty in it.

 

[Douglas]

I'd never "knowingly" sign a note with any kind of prepayment penalty in it.

If the seller wanted it and the note was at a lower rate than i could finance elsewhere or the cost of the property was attractive, i would consider it. It would just become another party of the cost(interest) negotiation.

 

[TexasBred]

I'd never "knowingly" sign a note with any kind of prepayment penalty in it.

If the seller wanted it and the note was at a lower rate than i could finance elsewhere or the cost of the property was attractive, i would consider it. It would just become another party of the cost(interest) negotiation.

Why not just pay a point or some part of a point up front and ask the lender to delete any prepayment penalties from the deed of trust and then have the right to pay it off when YOU want to?? No need to keep making payments and paying interest another 5-10 years when it's not necessary even with a "below market" interest rate. Don't know what kind of penalties are written into notes these days. Use to know a place that charged an additional 30 days interest. I'm sure there are other methods of calculating them as well.

 

[Douglas]

Texasbred your are right from the buyers perspective. I was talking about the sellers needs. In the case i described above, the profits went from being untaxes (low income elderly couple) over several years to being 20% taxed in one year because of prepayment. That is a disaster from a tax planning point of view. You have to prevent that kind of thing by prepayment penalties, establishing an excrow to release the deed of trust, not selling, or looking for another buyer, etc. If i am a buyer i don't want any prepayment penalties either. Just depends on how much you want the property.