Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

For regular readers, you know that I am a CERTIFIED FINANCIAL PLANNER™ who believes in owning real estate investments as a part of your overall financial plan and strategy. I work with many real estate agents and real estate investors who own several real estate investments in their total portfolio. As great as it is to own a property that significantly appreciates, it can also become a big problem to the successful, busy professional. It can become a tax bomb when you are ready to divest it from your portfolio. Let me share a real example that might just provide some options if you find yourself wanting to rid yourself of a largely appreciated property.

Recently I came across financial planning scenario where I was approached by an individual who desperately wanted to get a problem rental property out of her name. This particular rental property was in a state half way across the country, which added to the difficulties. In an effort to help out a family member, the property was be rented out to a cousin at just under fair market value. The first thought is to just sell it outright to the cousin and be done with that headache of a rental. However, after she thought about it, she realized she had a problem for 2 reasons:

  1. The cousin needed the rental is because he is having financial problems, so it was easier for him to rent from a family member. And because he is having financial problems, he does not have the money to buy the property, nor could he qualify for a loan. You can see the hesitation and stress she felt. She felt an obligation to help him, but not if it meant she couldn’t feel financially free from this property.

  2.  The property has significantly appreciated in value since she had bought the property over 15 years ago. She was already a high-income earner and now facing a large hit in capital gains would cause more of an immediate tax hit than she was willing to pay. When tax planning is already a major focus, adding more of a tax burden was not a desirable solution.

As a CERTIFIED FINANCIAL PLANNER™, I needed to find a solution that could provide the best of both worlds; to help the cousin by allowing him a way to continue living in the home, and also to remove the property from her name without causing a huge tax hit. I knew there were many options we could explore, but I always strive to find the right solution for a unique individual’s needs. That can mean different things to different people. I needed to provide a solution that would give her relief by taking away the weight on her shoulders while giving her a sense of purpose and duty by helping a cousin who is down on his luck. So, I spent some time projecting out the financial possibilities and put together a plan for her review.

Installment Sale

An installment sale is a device for spreading out and deferring taxable gain on an investment or property.

Here’s how it works:

· Seller can remove an appreciating asset from his/her estate by substituting installment payments from the buyer over a period of years

· Seller takes the capital gains income in his/her control by having an attorney draft the agreement

· Buyer obtains the property on date of sale and agreement

· Capital gains are spread out over a period of years by taking the gross sale proceeds subtract selling expenses equals gross profit percentage. Then this gross profit percentage is applied to each installment payment received

· An interest is charged to the buyer and received as ordinary income to the seller

The benefit to an installment sale for this particular individual is that she didn’t have to take a large capital gains hit in one year. This means that her income tax bracket didn’t get pushed up into an even higher marginal tax rate. It also means that she will not be pushed into additional taxes like the alternative minimum tax (AMT), the net investment income tax, and keep income low enough to qualify for certain tax credits.

In the situation of the individual who approached me, she was thrilled with the installment sale strategy and thanked me for my time and expertise. She never thought she would be able to find a solution that provided all her wants. She thought that she would have to sacrifice somewhere, and someone would have to walk away from the scenario unhappy. This literally provided more benefits than she ever expected.

It is important that if you are thinking an installment sale might be right for your situation, you should look into the IRS guidance on installment sales and talk to your accountant. However, I hope that this helps the real estate agent or real estate investor add another tool to their tool belt and save on their taxes while adding another income stream.

For those that want to project out this financial strategy and how it matches up with your overall financial plan, I’m here to be a sounding board and resource. Call our office! For more information on financial strategies, check out our blog for further material.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

 Asset allocation does not ensure a profit or protect against a loss.

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