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MikeT/NC

Owner finance tax issue

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I was told that when you get owner financing with a no interest, principal only monthly payment that the IRS will charge the seller a certain amount of tax on the interest that he didn't collect. So I called a mentor friend of mine and he said it's no problem as long as you don't mention anything about zero interest in your documents. Which one is right?

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There's something called "inputed interest", but I'll need someone to chime in and explain what that is.

 

Lynn (FL)

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Sorry Mike, your mentor is dead wrong. It doesn't matter that your loan documents mention zero interest or not. The IRS, as Lynn said,
will 'impute' interest on loans that are made interest-free, or at a discounted interest rate that is below market. Each month the Service
publishes Applicable Federal Rates, which are used for imputed interest. The service will charge the seller taxes on that amount of
interest whether received or not.

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Bill, how do you handle the situation then. If a distressed owner came to you and is willing to accept $500 per month with no interest, do you tell him he is going to have to pay tax on money he isn't getting? Or do you work out an amortization schedule with part of the $500 being interest? Or just pay more and let part of it be interest?

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Bill, how do you handle the situation then. If a distressed owner came to you and is willing to accept $500 per month with no interest, do you tell him he is going to have to pay tax on money he isn't getting? Or do you work out an amortization schedule with part of the $500 being interest? Or just pay more and let part of it be interest?

Hey Mike..I make sure that the note has a stated interest rate that is at least equal to the Applicable Federal Rate. If the seller is willing to accept $500 per month, I use that as my P & I, use the AFR and prepare an amortization schedule.

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