MikeT/NC 5 Report post Posted March 8, 2013 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? Share this post Link to post Share on other sites
lhenley 8 Report post Posted March 8, 2013 There's something called "inputed interest", but I'll need someone to chime in and explain what that is. Lynn (FL) Share this post Link to post Share on other sites
bwalston 1 Report post Posted March 11, 2013 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 Servicepublishes Applicable Federal Rates, which are used for imputed interest. The service will charge the seller taxes on that amount ofinterest whether received or not. Share this post Link to post Share on other sites
MichaelC 160 Report post Posted March 11, 2013 Interesting, Bill. Thanks for that clarification. Share this post Link to post Share on other sites
MikeT/NC 5 Report post Posted March 18, 2013 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? Share this post Link to post Share on other sites
bwalston 1 Report post Posted March 20, 2013 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. Share this post Link to post Share on other sites