Unformatted text preview: d $80,000 for a home to find that same home to be valued at $250,000. Clearly the owner has “made” a great profit. If the owner “realizes” this profit through the sale of the home, there is a capital gain, which is subject to tax consequences unless the owner rolls the gain over into another personal residence of equal or greater value. Even the once–in–a–lifetime age exemption would not exempt all of the gain in this example. An installment sale would only defer the gain by spreading it out over a period of time. TAX–FREE INCOME – Refinancing does not usually give rise to tax consequences. Therefore, through refinancing, the owner realizes cash from this profitable investment by generating income that in most cases is tax–free income. (An exception is if the loan is “forgiven” or goes into default. The IRS would consider such a loan to be taxable income to the property owner.) BALLOON PAYMENT
The “Easy Pay” Plan – If a loan is written with monthly payments to be made as if the loan were to be paid off over 30 years, but with the final payment of the balance due in five years, the payments are much easier to make (lower) than if Dynasty School (www.dynastySchool.com) 15-3 REAL ESTATE FINANCE
the loan were to be fully amortized with level monthly payments over five years. That is, all of the payments except the last one will be easier to make. Payoff – This property will have to be refinanced to pay off this required balloon payment. Seller Carry–Back – A seller who “takes back” a second mortgage (trust deed) may want a “short fuse”–a balloon payment to be due within four or five years. Such loans are easier to “cash out”–sell to private investors looking for short– term investments in the secondary money market. Trustors of these loans are faced with the requirement of early refinancing. Some economists recommend that a buyer/borrower try to obtain at least a seven year period before a balloon payment. PLANNING FOR SALE
Assumability – An owner planning to sell a home, or an investor planning to excha...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10