Carrying a Mortgage but deferring the income?

[Wingnut]

I was looking around at some of the tax sites online and haven't found an answer to this particular scenario. I thought maybe someone else might have thought of this and figured it out. I am trying to defer income to a lower income tax year.
I will retire at 55 (18 mo), but have a steady income stream over 200k until I am 57. Between 57 and ?? (probably 3-4 years), until I start to draw down my retirement accounts, SS etc, we will need some income in addition to my wife's salary.
I own my home free and clear (400k) and can sell at any time (planning on 2016). I have no need of the increasing my income until age 57, I was thinking of forming an LLC or some other corporate entity to receive the income from the mortgage payments in 2016-2018, but hold it in escrow until 2019 and beyond, distributing the balance and all future payments as income from that point forward.

 

[Senator]

I was thinking of forming an LLC or some other corporate entity to receive the income from the mortgage payments in 2016-2018, but hold it in escrow until 2019 and beyond, distributing the balance and all future payments as income from that point forward.

All income earned in an LLC is passed back to the owner, in the same year. If you form an S-Corp, the S-Corp will have to pay taxes on the earnings.

Assuming you earned the money yourself, putting it in an LLC makes no tax sense.

 

[Wingnut]

Thats what i expected. Thanks for the reply


Sent from my iPad using Early Retirement Forum

 

[ivinsfan]

I'm confused by this question, do you live in this home? I believe the capital gain exclusion on a home you have lived in for 3 of the last 5 years is still tax free on the federal end anyway. State rules may vary of course. Of course interest charged would be taxable,but probably not a big deal in the scheme of things...

 

[robertf57]

I am totally not understanding this question. If you own the home and have met the residence requirement (3 of the last 5 years, I think) than your capital gains are Tax free. It looks like you are planning on financing the sale. Not certain why you want to take on that risk; but, the interest income you receive would be taxable to you even if in an S-corp or a LLC as they are passed through. I don't think the entities would help you at all. If you do a C corp, the income will end up being double taxed. I don't see any advantages here.

I personally wouldn't want to hold the paper on a single mortgage anyway. Too concentrated a risk and you have limited your gains on your capital to the mortgage rate....

 

[Wingnut]

To clarify, i am not concerned about the capital gains from the sale, as it was my primary residence. I was wondering if there was a mechanism to delay receipt of the proceeds from the mortgage payments for a year or two until my income drops.
In 2016-2018, i will be in the 33% bracket, post FIRE (gold parachute from mega corp)
From 2019-2025, i will be in the 15% bracket. (Pre pension, SS payments)
Beyond 2025, the bracket will likely increase again. (All sources of retirement income firing on all cylinders)

It seems like there is not a simple way to defer income received in 2016-2018 (mortgage payments) until 2019 and later. As this is a relatively small sum for a relatively short period, complex entities would be too expensive and not worth the effort.


Sent from my iPad using Early Retirement Forum

 

[Wingnut]

To further clarify, i was asked if carrying the mortgage was possible. And yes, it is possible, although the responders are correct; i am not crazy about this risk, i'd prefer to sell it and be done with it, but i know the property well, so i see the risk as minimal, all else being considered.


Sent from my iPad using Early Retirement Forum

 

[pb4uski]

I wonder if you could design the payments by contract so that they are principal only for the first few years and then interest and principal but at a higher rate of interest so it achieves the effect you desire. I think it would be a risk and a problem would be that the borrower would not get an interest deduction in the years they are paying principal only.

 

[Wingnut]

I was just thinking the same on the way home from work. I was actually thinking of an escrow account to hold the money and then disperse it in the 2019 timeframe. I would show all the income in that year (to date) and the buyer would have all the 1098 interest in that year.
in the first 3 years of a 30 year mortgage, a principal only loan is almost a total deferral. Thanks for the tip.

 

[robertf57]

I was just thinking the same on the way home from work. I was actually thinking of an escrow account to hold the money and then disperse it in the 2019 timeframe. I would show all the income in that year (to date) and the buyer would have all the 1098 interest in that year.
in the first 3 years of a 30 year mortgage, a principal only loan is almost a total deferral. Thanks for the tip.

If the buyer is willing to not get his interest deduction in those first years, as this scheme requires, then just write the contract to pay you beginning in the 2019 time frame......