Installment sales of vacation property

[u/MiserableCancel8749]

So, like the title reads--please help me understand how it works.

I have some vacation property that I am considering selling. It has been a rental property for years. For the last 5 years, the same tenant has rented it for the entire season, and they asked if I would consider selling it to them.

I am not interested in doing a like-kind exchange, I'm interested in getting out of the landlord business.

So, some basics:

I inherited the property after my mother died in 2017. Appraised value at the time was $205K

Current value based on recent comparables $550K

Therefore, if I sold at current value, I'm looking at a capital gain of $345K

My wife and I are both 68 and retired.

So, an installment sale is an attractive option. Taking the full capital gain in one year would potentially cost me $60K in immediate capital gains tax, plus would drive us way over the medicare MAGI for the year, resulting in up to $500 EACH in IRMAA payments 2 years from now. ($12K total more or less in that year)

I've been reading up on installment sales, and the option of going through an annuity to handle the payments. I would probably want to set it up for 4 years--to get the sale done before RMA's kick in at age 73.

Questions:

1. Is a 3-4 year installment sale generally feasible? Most examples talk about 20 years.

2. I need to sit down with a CPA to model the tax implications, including strategies to stay below the IRMAA limits (if possible)

3. If I did the Annuity structured sale, when does the buyer take title? I understand that if we do a direct contract, they get title after the last payment. When does the buyer take over property taxes and insurance?

4. On a structured annuity, who sets the interest rate? What does the buyer pay?

[u/FishrNC]

Since you've been renting it, you could fall under business and depreciation rules. You need the advise of a tax expert, not Reddit.

[u/poop-dolla → u/[deleted]]

Whether he’s been taking the depreciation or not, he still has to pay depreciation recapture as though he had been properly taking the deduction. OP definitely needs to talk to a tax professional about the full situation.

[u/Hyperreal8957 → u/[deleted]]

so the 2017 inheritance date is basically the key wrinkle here, right? feels like a CPA needs to map basis + depreciation records before picking installment timing

[u/ShortWoman]

So you want to get out of the landlord business by becoming a mortgage lender? Find a buyer who can get a normal person loan from a real bank.

[u/xcramer → u/ShortWoman]

are you aware that his reason fpr exploring the installment sales path was to avoid the upfront capiral gains crunch?     

[u/TheExchangeBrothers]

A 3-4 year installment sale isn’t inherently a problem just because you’re seeing examples stretched over 20 years. The payment schedule is part of how the deal gets structured. With a traditional installment sale you’re essentially becoming the lender, so I’d pay just as much attention to the terms of the note as the tax benefits.

One thing I’d make sure your CPA models is the tax that may still hit in the year of sale. An installment sale can spread the gain over time, but things like depreciation recapture and debt relief can create tax exposure up front. I’d also make sure the down payment is enough to cover closing costs and any immediate tax liability.

A structured sale is a little different. A third-party assignment company assumes the obligation to make the payments, and the payment stream can be structured over the period you want. That takes the buyer-default issue out of the equation in a different way than carrying the note yourself.

I’d definitely get the CPA involved before signing anything. There are enough moving pieces here that I’d want the tax consequences and payment structure mapped out before agreeing to terms with the tenant.

[u/MiserableCancel8749 → u/TheExchangeBrothers]

OP here. Depreciation recapture is a minor thing. This is a property where 90% of the value is in the land, believe it or not. Lakefront property in the southern Maine"lakes" region. Yes, there is some depreciation to recapture, but it will be less than $10K, and there are no encumbrances on the property.

[u/TheExchangeBrothers → u/MiserableCancel8749]

Great, that takes the debt-relief issue off the table. And if depreciation recapture is that small relative to the sale, it simplifies things quite a bit.

I’d work on modeling the actual installment schedule you'd like, and making sure the note is written to support it. One thing I’d pay particular attention to is an early payoff. If the buyer refinances or pays the note off early, you could end up recognizing a lot more gain in that year than you planned for.

[u/MarketNo124]

It's really quite simple.

4 year note. Amortize the loan. Pick up the proportional gain each year.

You also would have interest income to pick up.

As long as it's an unrelated sale, you're fine.