Vacation Rental Isn’t Paying The Bills
Sarah and Bob purchased a second home in a resort community less than a decade ago. With their three kids at home, the property was a great escape for the family. When they weren’t using it, they were able to rent it and reduce the monthly expenses.
The kids have now left for college and the value of the house more than doubled since it was purchased. The house isn’t used as much by the family and the increased rents still do not cover the mortgage and monthly upkeep. Sarah and Bob are out of pocket several hundred dollars per month. If Sarah and Bob sell the property they will pay tax at regular capital gains rates on the gain plus an additional amount of the depreciation they have taken.
CA TD Investments purchased the home from Sarah and Bob and resold it. Sarah and Bob received a portion of the sales price of the home in cash and a portion of an installment note. Sarah and Bob paid a proportionate share of capital gains tax on the amount of cash that they received in the transaction. No capital gains tax was paid on the amount that was received in an installment note. Sarah and Bob are receiving a steady 7% income on the installment note.