Eliminate Tenant Issues, Risk Of Ownership, “Being Tied Down” By Your Property, PLUS We’ll Help You Defer Capital Gains Tax…
Time and time again, when we talk with people who want to sell their apartment building… when they have a lot of equity in the property… the biggest issue that holds them back from selling is the big capital gains tax bill waiting for them on the other side of the sale.
Depending on your income level, the capital gains tax bill can be pretty hefty. The top federal capital gains tax rate is up near 30%… plus add on the state capital gains tax rate (if there is one) and that could put you up near 40%.
So, how can you sell your San Francisco Bay Area apartment building while at the same time deferring your capital gains tax bill for future years (when hopefully your taxable income is lower and decreases your overall capital gains owed on the sale)?
Several Ways To Defer Capital Gains, Including Carrying Back A Note
When we work with sellers here in the San Francisco Bay Area… many sellers would just rather sell their property, collect the income stream each month, and get rid of the risk / tenants / maintenance / unforeseen expenses that always pop up. One of the best ways to create a tax-deferred income stream out of the sale of your apartment building is to sell by carrying the note for the buyer.
Carrying a note is simply you acting as the bank on the purchase of your property. And just like the bank, you’ll…
- Earn interest on the note (usually 5-8%, which is much better than most alternatives)
- Have a secure interest in your property in case the buyer defaults on the loan
How You’re Taxed From The Sale Of Your San Francisco Bay Area Apartment
If You Sell To A Cash Or Bank Financed Buyer – If you’ve owned the property for over 12 months, you’ll be taxed at the capital gains tax rate (state and federal) on the profits all in the tax year of the sale. Example: You sell your 4-plex for a $200k profit (not taking into consideration depreciation recapture). If you’re in the highest tax bracket and live in California which has a state rate of over 9%, you’d owe approximately $76,000 in capital gains tax for that tax year.
NOTE: Often times a big sale like this can bump the seller up into higher tax brackets than normal for that year because of the windfall of profits.
Carry Back A Note To The Seller – Under the same example as above, lets assume you sold that 4-plex for the same price, netting $200k in profit. However, you’re carrying back a 15 year note at 7% for 90% of the purchase price. This would mean that you’re taking 10% of the sale at close (so you’d be taxed on that payment this year), then the remaining 90% of the sale price will be paid to you in equal monthly payments over the next 15 years, earning 7% in the process.
You’d be taxed the normal income tax rate for the interest income on the 7% each year, but would only pay the capital gains tax as you receive payments from the buyer each year. Effectively deferring capital gains tax.
NOTE: The main benefit of deferring capital gains this way is in the hopes that in future years you’ll be in a lower tax bracket when you retire… which would / could decrease the amount of tax you pay in the long-run.
Decide What Tax Strategy Fits Your Goals
Again, we’re not tax professionals, so consult with your financial and tax advisors before you make any decisions.
Ultimately, if you’ll need the cash from the sale within the next 12 months, offering to carry back all or the majority of the sale likely won’t be a fit for you.
However, if you don’t need the cash from the sale soon… and you can’t earn at least a 5-8% return on the money if you were to sell and put the money elsewhere… then carrying back a note on the sale (for all or part of the sale) may make a lot of sense.
If you’re interested in sitting down with us and discussing the value of your property and seeing if it’s a fit to sell your property to us, give us a call at (415) 875-0177 or go through the link below to send us some basic info about your property.
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