Here's a hidden "Gotcha" for seller financing.

By
Real Estate Agent with RE/MAX By The Bay

Every now and then you might be asked by a seller or buyer if seller financing could be an option to make a transaction work.

A common scenario might be for a buyer to ask a seller to take back a small second mortgage (we're talking about a legitimate, recorded, and disclosed second here) in order to help them get into a home.

Being a good guy the seller says "sure, I'll do that and because I like you so much I'll only charge you 3% interest on this $25,000 second you're going to pay off in 5 years."

Sounds like a match made in heaven; a gracious seller and a grateful buyer, a meeting of the minds, and a paycheck for their Realtors.

All goes well and a couple of years down the road your seller goes to his mailbox and there's a letter from the IRS.

"Greetings" says the letter; "We've noticed you're carrying a second mortgage on your former principal residence and only charging 3% interest."

"That's nice but the AFRs (Applicable Federal Rates) for seller financing say you should have been charging 4.88% for a mid-term note so we've imputed the correct interest rate for you and you still owe..............................."

OUCH! You're 'good guy' seller is now not only stuck with a tax bill for back taxes he's also looking at paying interest on money he still won't be receiving in the future because the note rate for his second mortgage is only 3%.

AFRs also fluctuate according to money market conditions so it could be even more next year than it is this.

You need to consult a qualified tax professional to advise sellers before advising them to do any sort of seller financing.

Posted by

Jim Lee , REALTOR®, Certified Residential Specialist (CRS)

http://JimLee.com  RE/MAX By The Bay

150 Mirona Road, Portsmouth, NH 03801 Phone: (603) 431-1111 x3801

Visit New Hampshire Maine Real Estate.com to search homes, get Seacoast area information, and find out how great living on the New Hampshire and southern Maine Seacoast really is.

 

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Show All Comments
Rainmaker
795,743
David Spencer
Keller Williams Team Realty - Bloomingdale, IL
Chicago Area Commercial-Residential R.E.
I always advise clients about AFR. Illinois has no prepayment penalty on any loan to finance a resident except if the rate is below 8%. They usually don't read the fine print that far. Had any 8% loans lately>
December 24, 2006 07:00 AM #1
Rainmaker
449,396
Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
The Agent Who Uses "Watermelon Tough" Sign Posts

Jim,

I had never heard of that.  Thanks for bringing it to my attention.  It's along the same lines of "forgivness of debt" income that you can get taxed for.

All these crazy rules just make me a bigger supporter of the fair tax plan.

December 24, 2006 08:43 AM #2
Rainmaker
605,739
Sharon Simms
Coastal Properties Group International - Saint Petersburg, FL
St. Pete FL - CRS CIPS CLHMS RSPS

You're absolutely right here, Jim. We should alert our clients, and also - take that into consideration when doing low interest or no interest financing for relatives.

 

December 24, 2006 09:53 AM #3
Rainmaker
334,601
Ann Cummings
RE/MAX By The Bay - NH and Maine - Portsmouth, NH
Portsmouth NH Homes - Service With a Smile!

Jim - thanks for sharing this info about AFRs.  I'd never heard about that before.

Ann

December 24, 2006 10:42 AM #4
Rainer
148,171
Marc Blasi
Boca Executive Realty - Palm Beach Gardens, FL
Marc Blasi -Country Club and Waterfront Properties
Thanks for the tip Jim- I never heard of this but I'm certainly going to look into it!
December 24, 2006 10:43 AM #5
Rainmaker
591,126
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Jim,

Great advice.

We can only hope that you influence a few to make new years resolutions to get more education. This is nothing new. But, it is very heavy for Christmas Eve. So I'll write no more.

Merry Christmas To All and To All A Good Night!

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

December 24, 2006 02:35 PM #6
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Rainmaker
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Jim Lee

Portsmouth NH Realtor, Portsmouth, NH
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