Robyn Seymour - Real Estate Notes and Installment Sales are Used to Lower Taxes Legally

From the sale of your home you may qualify to exclude from your income either all or a part of any gain. This means that, if you qualify, you will not have to pay tax on the gain up to $250,000 if single and $500,000 if married. To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years (the ownership test) and lived in the home as your main home for at least 2 years (the use test)

For many parts of the US a half million dollars in exclusion per married couple every 2 or 3 years is more then enough. However, if you live in California and few other places within the US; you can easily max out your exclusion and end up paying capital gains taxes on $100,000 to $300,000 easily. Example: Mary and Joe bought a home in 1980. They had upgraded from a smaller home and the new home was in a very nice neighborhood. The area, over the years increased in value and now the home is worth $850,000. Mary and Joe only paid $129,000 for the property. That is a gain of $721,000 - The house is paid for.

In order to avoid paying capital gains on the amount over $500,000 -Mary and Joe decided to carry a note for $221,000. The new owners will pay Mary and Joe principal and interest each month. The note is for 20 years; (Mary and Joe will use the income as monthly retirement income) Interest rate of 7% For those of you who are into numbers you will, understand that Mary and Joe will earn a substantial amount of money on the real estate note of $221,000 over time. But more importantly, Mary and Joe will lower their taxes by not having to pay capital gains on the $221,000; the amount over the $500,000 exclusion.

IRS Tax Code: Installment Sale of Your Primary Home; Sales made under arrangements that provide for part or the entire selling price to be paid in a later year. These sales are called “installment sales.” If you finance the buyer's purchase of your home yourself, instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. You may be able to report the part of the gain you cannot exclude on the installment basis. To take this plan a step further; if Mary and Joe decide that they want to cash out the $$221,000 note once they are age 65 or older and their annual income is much lower, they can do so. They can still march away with a large amount of cash even the note is discounted.