Seller Financing, Gift Properties, Tax Deferrals For LLCs & More: Weekly Real Estate Q & A

The following is excerpted from a weekly question and answer session in which readers’ queries are responded to by Robert J. Bruss, a licensed real estate broker and industry expert.

~~~~~~~~~~~~~~~~~~~~~~~~~

Q: I have been reading about the home seller acting as the lender in some cases. It makes sense from the home buyer’s view, but what about the home seller? If the seller sees a large profit, up to $500,000 is tax-free for a married couple. What’s the use of that gain, though, if they can’t take advantage of other investment possibilities? Can they receive any tax benefit for carrying back the mortgage for their home buyer? Do they have to pay income tax on the interest income?

A: Yes, interest income is always taxed as ordinary income, but the big advantage for sellers who carry a mortgage for their buyer is the tax-free home sales proceeds — up to $500,000 for a qualified married couple and up to $250,000 for a single home seller — with a high yield. Also, easy financing typically results in a quick easy home sale at a high price.

In today’s investment market, where can a seller invest the proceeds to earn at least a 6 percent annual return with the safety of a mortgage or deed of trust? If the home buyer defaults, the seller can foreclose and either…

1. Get paid in full by a bidder at the foreclosure sale.
2. Get the house back to sell again, for a second profit. Bottom line, home seller financing benefits both home seller and home buyer and is growing in popularity.

Q: As a senior, three years ago I deeded my home and acreage to my only son to save him from probate after I died. Well, I survived cancer and am still living in my home while my son farms the acreage (he, his wife and two children live nearby). The problem is that now I want to move to a better climate like Arizona or Florida, and don’t have any money because I gave away my property. I could easily sell the property, but I no longer own it. Of course, my son doesn’t want to give it back or sell it and give me the sales proceeds. What can I do?

A: Once you give away real estate, there is no way to get it back unless there was fraud, duress or a mistake involved. This situation is a strong lesson to owners not to give away real estate before passing away.

Q: I buy land in my LLC (limited liability company), then develop it into lots for residential neighborhoods, and sell the lots to builders. Is there any way to minimize my tax liability to receive long-term capital gain tax rates? When you are in the highest tax bracket, it almost isn’t worth the work after they get paid.

A: Unfortunately, you are taxed as a real estate “dealer,” and not as a long-term investor, which means your profits are taxed as ordinary income rather than at the 15 percent federal income tax rate for long-term capital gains — which is much lower. You can buy some properties for long-term investment, however, and leave others for short-term “flipper” profits that will be taxed as ordinary income. Consult your tax adviser to learn more.