WLCCI

A higher interest rate may encourage the seller to accept terms that would otherwise be unacceptable. This technique could allow a seller to postpone a portion of capital gain that might otherwise have to be reported in an installment sale under the new tax law.

For example, a seller has a property for sale at an asking price of $100,000. The property has an existing assumable mortgage of $50,000 payable at the rate of $450 per month. The seller wants $10,000 cash at close and will extend you a loan of $40,000 in the form of a mortgage at 10% interest.

Offer the seller $95,000 with no money down. Agree to take over the loan of $50,000 and pay 15% interest on the remaining $45,000 for a period of five years. The result is a monthly interest payment of $563 ($45,000 x 15% divided by 12 months) to the seller. You initially pay only the interest with $45,000 due in five years.

If the total monthly payments for the first and second mortgage of $1,013 per month ($450 + $563) result in a negative cash flow, restructure the second mortgage so that only a portion of the 15% interest is paid monthly. The balance would be accumulated but not compounded and would be due along with the $45,00 at the end of five years.

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