When someone unilaterally alters the terms of a deal, walk away!
We sold the condo - or will be selling it shortly. We had a lot of showings in the first two weeks - at least a dozen or more. One problem in selling the place is financing. Since the majority of units are now owned by investors, Fannie Mae financing is not available. It's either a VA loan or cash sales - and that limits your buyer pool. As I have discussed ad nauseam here in the past, the value of Real Estate (or anything) is determined by supply and demand, and if the demand pool shrinks, so do prices.
We listed it at $165,000 which is in line with other recent sales for admittedly nicer appointed units. That is still very cheap for walk-to-Metro in the DC area. We got one offer for $145 with $115,000 cash down and asking us to "take back" a $30,000 note. Since I bought 917 Duke Street with a similar arrangement back in 1994, I was receptive to the offer and asked them to put it in writing.
The offer came back at $135,000 (with no explanation) and putting $100,000 down and asking us to finance $35,000 over three years at one percent for some reason. We countered at $140,000 with the note at 6% and they ghosted us. All for the best, anyway, as the next day we got an all-cash offer, no contingencies, at $150,000. Sold!
I ran into a similar thing with Duke Street. I had listed the place for rent and an insurance agent (Boo! Hiss!) called me and said he wanted to buy the place for $640,000. I was not on the market to sell, but was open to the offer. He put together a written offer that changed, subtly, several terms of his verbal offer. One change was that he wanted (verbally) to have 15 days to inspect the property and do an "economic analysis". I agreed, only to be chagrinned to see he wrote the contract (which he typed up himself - a first warning sign) to read fifteen business days which is nearly a month.
Not surprisingly, his "inspection" claimed the building was riddled with defects, but out of the kindness of his heart, he would give me $400,000 for it as an act of charity. I realized he was a time-waster and moved on and rented the place for another year and sold it for $680,000 with no contingencies. Today it is once again a residence, as the market for office space has evaporated over time. But it was an interesting lesson to be learned.
And the lessons are many. When people try to "sneak" in changes in a contract, watch out. A contact is a "meeting of the minds" not a game of "gotcha." And when (as he did) you represent a written contract as encompassing the terms discussed verbally and via e-mail, but instead sneak in changes, well, that's pretty much fraud. Just walk away from people like that.
The other thing is that, while home inspections can be useful to a buyer (particularly a first-time buyer) in deciding whether or not to buy, some buyers think they are a cudgel to be used to cram down the price on a home by getting a friendly home inspector to find "defects" in the property. They will then try to threaten you by arguing that if you don't sell to them you are obligated to disclose these alleged "defects" to anyone else looking to buy the property. It is a shady way of low-balling people and in the commercial or investor class of real estate, it isn't done much. But it is used against amateur sellers all the time, so seller beware!
When I told the insurance agent (buyer) to piss-off, he started screaming at me on the phone. He thought I was desperate to sell or something and that by tying up the property for nearly a month he would catch me in a cash-crunch. I should have seen the signs early on. But I learned from the experience.
But now on to today's topic - the installment provision of the tax code! One problem with making money is that you have to pay taxes on it. And paying taxes is only fair - up to a point - but getting socked with a big tax bill all at once isn't fair at all. And the tax code assumes your income is steady, so when you get a one-time windfall, they assume this is your new normal and tax you accordingly. Hourly workers notice this when working overtime - the withholding jumps up because Uncle Sam assumes this is your new norm.
So, for example, we sell this condo for $150,000. Since the property was fully depreciated ages ago, our capital gains are easy to calculate - the entire sales price is a capital gain. Problem is, we live on about $40K-$50K a year in 401(k) savings (no debt!) so that would put our income at $200,000 a year, which means we are boosted into a much higher bracket. Fortunately, I was able to move the closing date to January, so the income will be taxable in 2025, not 2024.
Still, even then, it is problematic. In addition to paying the capital gains taxes, we also will lose our Obamacare subsidy (nearly $20K!) or have to pay it back. Again, the government (whose employees receive regular checks) assumes that a one-time blip in your income is a new norm and should be taxed accordingly.
One way around this is to spread the gains over a number of years (which the IRS forces you to do with passive losses!) through the installment provision. Take back a mortgage on the property and receive monthly mortgage payments. You get paid interest (ordinary income) as well as principle (capital gains) but your tax burden is spread out over a number of years.
There are other advantages as well. For example, by offering owner financing, you may increase the size of the pool of buyers, which means you can ask a higher price. In terms of an "investment" it is pretty sound, as the debt is backed by the property and if the tenant buyer stops paying, you can foreclose, take the property back and sell it again to someone else. It's like being a landlord without having to unclog toilets. Just make sure the down payment is enough to cover potential foreclosure costs, should the need arise.
But in our case, we decided to take the cash offer. And some would be quick to note that long-term capital gains are taxed at relatively favorable rates. However, if you have short-term gains (such as in house-flipping) they may be taxed as ordinary income. Moreover, if you are selling a property over a half-million or so (see chart below) the rate may jump to 20% - which makes the installment provision look attractive.
Note also the 0% rate for gains under about fifty grand. This makes a three year installment note of 50K a year look attractive!
For us, it is the Obamacare subsidy which is the issue. It amounts to nearly half our annual income and thus would really screw us in terms of accelerating the depletion of our 401(k) balance. Punting this gain to 2025 at least lessens that impact as I am going on Medicare in March, and that just leaves Mark on ACA, which should cut our premiums (and thus subsidies) in half.
After taxes and payback of ACA subsidies, however, there will be barely enough to live on for more than a year or so. Sad math! But it is time to downsize, and the condo was becoming a break-even proposition, starting several years ago.
Next Up: Is it time to look at retirement communities? Perhaps.
|
Tax rate |
Single |
Married filing
jointly |
Married filing
separately |
Head of household |
|
0% |
$0 to $47,025 |
$0 to $94,050 |
$0 to $47,025 |
$0 to $63,000 |
|
15% |
$47,026 to $518,900 |
$94,051 to $583,750 |
$47,026 to $291,850 |
$63,001 to $551,350 |
|
20% |
$518,901 or more |
$583,751 or more |
$291,851 or more |
$551,351 or more |
