DEAR BOB: We own our home plus some rental property. As we are "elderly" and want to move to south Florida by next winter, we plan to sell our properties now. You often say its smart for a property seller to help finance his or her buyer's purchase. As we will be living away from our former properties, what are the pros and cons of selling for 10 percent down payments and taking back mortgages? Also, as we are well over 55, will our sale profits be tax-free? June T., Alexandria.
DEAR JUNE: Let's tackle your tax question first. The $100,000 home sale tax exemption only applies to profits from your principal residence, not to other properties. To qualify (1) you or your co-owner spouse must be 55 or older on the day of title transfer, (2) that person must have owned and lived in the principal residence at least three of the five years before sale and (3) never have used this tax break before.
If you're owned your rental properties over 12 months, their sale profits are taxed as long-term capital gains. That means 40 percent of your profit is taxable and 60 percent is tax-free. For example, only $20,000 (40 percent) of a $50,000 profit is taxable as ordinary income and $30,000 (60 percent) escapes tax. Ask your tax adviser for full details.
The advantages of financing your buyer's purchase outweigh the risks. Benefits of offering "easy financing" include (1) quick sale for top dollar, (2) installment sale tax benefits to spread out the tax over future years, (3) steady retirement income and (4) superb security (your former properties) if the buyer defaults on his payments.
Although you will be living a considerable distance away from your former properties, that's no problem. A nearby bank, attorney or realty broker can collect the mortgage payments for you. If the buyer defaults, a local attorney can handle the foreclosure. You might get the property back after a foreclosure so you can then resell if for another profit.
DEAR BOB: We bought a new house and rented out our old one to tenants. Since this was formerly our personal residence, can we deduct depreciation on it? If so, how much can be depreciated? Carla T., Springfield.
DEAR CARLA: Yes, you can deduct depreciation after converting your residence into income property. In fact, the law requires you to deduct depreciation.
Your depreciable basis is the less of (a) your cost basis for the house or (b) its fair market value on the date of conversion to rental status. The land value, however, is not depreciable. Ask your tax adviser for details.
DEAR BOB: My wife and I are n our mid-70s. Our home is listed for sale. We are planning on spending six to eight months a year down south and getting a small place up north for the summers. We are debating whether to sell only for cash or to sell on a contract. With the market slow here now, we think the contract idea is best as we can offer one percent below the rate on commercial mortgages. How successful are balloon payment contracts where the balance is paid off in two or three years? Lynn C., Fairfax.
DEAR LYNN: Balloon payment contracts or mortgages are very safe for home sellers. The interest is welcome income, especially for retirees like you. By offering "easy financing," your home should sell quickly.
However, that "short fuse" mortgage could be dangerous for a buyer. Smart buyers insist on longer-term seller financing, such as four or five years, so they can build some equity in the home bfore having to refinance.
If the buyer doesn't pay the balloon payment, you can forelose, get the property back (or be paid off by a buyer at the foreclosure sale) and resell the home for another profit. Professional mortgage investors pray for such foreclosures.
DEAR BOB: Where can I buy that "Nothing Down" realty book you recommended in a recent article? Clarence D., Laurel.
DEAR CLARENCE: Robert G. Allen's excellent best-seller, "Nothing Down," published by Simon and Schuster, is available at larger libraries and bookstores.