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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 14426
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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If I am selling real estate and I still owe a loan balance the

Customer Question

If I am selling real estate and I still owe a loan balance
the lender (seller finance) have agreed to relend the money with new colatoral
is there any tax consequences if
1) we change the colatoral before closing the sale
2) he relend the money after closing
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.

MyVirtualCPA :

Thank you for your question, and thanks for using JustAnswer.com.

MyVirtualCPA :

There is no tax consequence of switching out collateral. Your tax will be determined based on the sales price of the property you are selling and your basis in the property

MyVirtualCPA :

So, if you switch out collateral before the closing of the sale or after the closing - there is no tax consequence of either scenario

Customer :

My cost basis 925000 sell price 1600000

MyVirtualCPA :

So your gain will be $675,000 and you will owe tax of 20% as capital gains

Customer :

What about his capital gain tax

MyVirtualCPA :

So your capital gains for this sale is $135,000

MyVirtualCPA :

He won't have any tax if he is purchasing the building

MyVirtualCPA :

You only have capital gains when you sell.

Customer :

His cost 600000

MyVirtualCPA :

But he's not selling anything, he's purchasing

MyVirtualCPA :

So he has no capital gains tax...only you do as the seller

MyVirtualCPA :

Now, when he goes and sells this property THEN he will have tax

Customer :

thinking about capital gain if he is relending the money

MyVirtualCPA :

There is no capital gain for relending money

MyVirtualCPA :

Lending money is not taxable

Customer :

I am talking about the person who sold the property to me and did owner finance

MyVirtualCPA :

So you are purchasing the property?

MyVirtualCPA :

I thought you said you were selling?

Customer :

I bought a property 3 years ago for 925000 paid some cash and srller financed tge rest

Customer :

now I still owe 400000 and I want to make payment on it

MyVirtualCPA :

They paid the capital gains three years ago, based on a sales price of $925,000

Customer :

after I sell this property

MyVirtualCPA :

They won't have capital gains when you pay off the property

Customer :

it was instalment sale

MyVirtualCPA :

Okay, then their accountant can tell them what their capital gains are during the year of the sale, because it is very complex

MyVirtualCPA :

I would have to look over all their tax returns to figure it out

Customer :

That's why I am asking you

MyVirtualCPA :

Yes but I can't calculate their gain, because I would have to have all their records.

MyVirtualCPA :

I can calculate your gain because this is the year of your sale

MyVirtualCPA :

Your gain is simple

MyVirtualCPA :

Theirs is complex. Their accountant who has been doing their returns would easily be able to tell them what the gain is in the current year. I could not.

Customer :

They were only paying capital gain on payments that were received

Customer :

and after cover their cost basis

MyVirtualCPA :

Yes, but there are calculations that go into play based on the percentages that were paid each year. I cannot calculate their installment gain.

MyVirtualCPA :

I would have to look at their prior year tax information.

Customer :

my qestion is

MyVirtualCPA :

Your question is what?

Customer :

If they take the payoff they will pay capital gain for the whole thing vs if they continue to lend the money they will only pay capital gain based on the total payments they receive every year

MyVirtualCPA :

Okay, I can answer that but I cannot calculate the actual gain. If you pay off the loan then they will pay the remaining capital gains tax in the year you pay off the loan. However, if you keep making payments they will recognize the gain as you make payments.

Customer :

correct

MyVirtualCPA :

Is there anything else you need from me today?

Customer :

the technical question is when to do the colltoral change brfor closing

Customer :

or after closing

MyVirtualCPA :

It doesn't matter.

Customer :

if the receive money and relend it they recognize gian

MyVirtualCPA :

Correct

Customer :

therefore they will pay capital gain

Customer :

but if they change collateral before closing they never tuch the money

MyVirtualCPA :

Yes...if they receive the funds they will have the gain

MyVirtualCPA :

I thought you were just swapping out collateral, that no money changed hands?

Customer :

Yes I am asking when to swap collateral is timing important

MyVirtualCPA :

The timing doesn't matter...they are not receiving payment they are just swapping out collateral

Customer :

basically on day of closing we will just sign new note on the new collateral

MyVirtualCPA :

That is fine ... that should not impact their capital gains

Customer :

Thank you

Customer :

how can I get a copy of this

MyVirtualCPA :

You can use your browser's print function

MyVirtualCPA :

or you can bookmark this page

MyVirtualCPA :

If satisfied with our communication, please rate as "excellent" so that I may receive credit for assisting you today

Customer :

Can I get email copy of this

MyVirtualCPA :

The site should send you an email copy after you rate

Customer :

Great thank you

MyVirtualCPA :

You're welcome. Please take a moment to rate my response as "excellent" so that I may receive credit for assisting. I see you have not yet rated.

Expert:  Megan C replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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Expert:  Megan C replied 1 year ago.
Thanks for allowing me the opportunity to help you. Please let me know if I can be of any further assistance to you in this matter. I really enjoyed working with you – please feel free to request me again when you come back to ask another question. Simply enter "MyVirtualCPA" in the subject of your question Thanks again for being a JustAnswer customer

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