Capital Gains Tax Question

[Westernskies]

Well, it's not ALL gloom and doom. I just got an unsolicited offer on a piece of investment property I purchased 15 years ago.

1. 20% down payment (~2.5X initial investment)
2. Contract terms.
3. Decent interest rate
4. Huge ROI (greater than 12.5X initial investment)
5. No Realtor
6. Escrow Co. to handle payments, taxes, etc. (split fees)

I will be getting paid out over time, but I am worried about Citizen Obama raising capital gains from it's current 15% rate, if he is elected. I don't think it would happen right away, but I don't want to take a chance on the rate going up during the contract period, which could increase my CG tax exposure if I carry a contract and pay as I go.
My thoughts are to declare all of the the CG up front, The DP will more than cover it, then the principal payments will be tax free in the years to come. (I realize that I will still have to pay taxes on the interest, as I receive it, but that should be ordinary income, correct?)
Not interested in doing a 1031 exchange, and this is a good chance to get out of this investment with a good ROI if I carry the contract.

Thoughts? Any of you financial types out there have any CG advice or experience to share as it relates to a RE contract?

I've never sold a piece of property like this, so I wiill appreciate any and all feedback.

 

[SteveL]

Devil in the details

To get an idea of how sweet a deal this is for the buyer, call a couple of banks and ask what their terms would be for such a loan. You are only getting 16% down, and prob a below market interest rate. The bank prob wants 25% down. These issues are more important than whether or not to do a installment sale.
Please, please, get a good atty who is familiar with real estate law in your state to do up the papers and make sure the mortgage is filed with the county recorder. Also, you need to consider who will do the collection of the payments, and notifying the IRS of interest paid etc.
Your CPA should be able to do a little spreadsheet that shows the difference/advantages of doing an installment sale.

 

[Martha]

One thing to think about is whether taking the big capital gain all at once will put you into AMT territory, causing a higher tax on your ordinary income.

 

[kaneohe]

Martha raises a very good point which could be the decider right away. Another thing to keep in mind is that, if nothing changes, there is a 0% bracket for capital gains perhaps for a few yrs that may/may not be available to you depending on your other income.

I know nothing about installment sales but it sounds like you need to get someone to look at the cashflows and taxation by year (including interest paid to you and taxation on that also), then look at the net cashflow and then the discounted cashflow (w/ some assumed interest rate) and then compare w/ a lump sum payment situtation (including taxes w/ perhaps AMT).