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How Does Seller Financing Transaction work?
STB: Seller take back mortgage or better known as a VTB
I'm going to show a breakdown but let's start with a few upfront assumptions.
1. I am not an accountant
2. This is for illustration only to show how the numbers work, this is not advice.
3. This is general advice and should not be considered specific, basically go get a tax plan if you're a seller.
Assumptions:
Let's call this an example I've worked on in the past where an older fellow (His name is Pietro) ran a construction business out of an industrial building. The industrial building has now had a land use change to "Mixed-Use" and can be used to build a 12 storey building.
A. The sale is $11,000,000
B. Pietro bought the property for $650,000 in 2002
C. Pietro is taking back a mortgage of $7,150,000 (65/35 LTV) for 3 years at 0% interest
D. The Property is owned corporately
C. There is no "recapture tax"
E. The property is bein sold as the only asset in the company and the capital gain is the only income of the company
F. Pietro is an old school man at heart, he doesn't really need any money right away from the sale he's just planning so if he passed away his kids wouldn't sell immediately
G. The company owned by Pietro outright has never had a capital gain in the history
Capital Gain Calculation:
Capital gain expected: $10,330,000
(keep in mind commissions, legals and accounting work on closing can be used as a way to reduce the gain)
Taxable Capital Gain (50% of the gain): $5,165,000
Taxation Calculation:
Corporate Tax on the sale is 50.17% of taxable gain:
$2,591,280
Due to the VTB Pietro can partially defer the gain for future years.
This is the advantage if used efficiently that is very helpful to sellers.
Timing of taxes payable:
Also important depending on timing, 3 year
Year 1
Gain: $5,165,000
Reserve: $3,357,250
Taxable: $1,807,750
Taxes at 50.17% of gain: $906,948
Year 2
Gain: $3,357,250
Reserve: $3,099,000
Taxable: $258,250
Taxes at 50.17% of gain: $129,564
Year 3
Gain: $3,099,000
Reserve: $2,066,000
Taxable: $1,033,000
Taxes at 50.17%: $518,256
Year 4
Gain: $2,066,000
Reserve: -
Taxable: $2,066,000
Taxes at 50.17% of gain: $1,036,512
Total Taxes paid: $2,591,280
So you see, there are two good options here to understand.
Pietro can defer how much taxes he pays up front.
If Pietro is smart he can take the cash he receives and put this cash into say an investment which returns him 10% per year. Thereby creating a return off the taxes not paid yet.
Pietro is happier for taking a Seller take back mortgage.
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