Old loan, new interest

Real Estate Investing for Dummies [tag]Seller financing[/tag], once used to attract buyers forced out of the market by high [tag]interest rate[/tag]s on [tag]conventional loan[/tag]s, may be making a comeback thanks to some areas handsomely appreciated market and the ceiling on [tag]tax-free home-sale[/tag] profits. “[tag]Owner-carry loans[/tag]” or “[tag]take-back loans[/tag]” — in which the seller holds the mortgage for an agreed-upon interest rate and period of time — gained popularity in the late 1970s and early 1980s when rates were in the double digits.

With seller financing, the seller can spread out the [tag]capital-gains tax[/tag] over the number of years agreed upon in the contract. By spreading it out, the seller can avoid being placed in a higher tax bracket. For sellers who don’t own their homes outright or won’t be able to pay off their existing loans in such a transaction, carrying a [tag]second mortgage[/tag] is a less attractive option. They run the risk of losing their investment if the borrower defaults. With seller financing, the principal that a seller receives each year is considered capital-gain income and is taxed at a lower rate. The rest is considered interest income and taxed at ordinary rates.

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