Someone asked me and I thought I knew the answer but maybe not. Do you agree on a purchase price when you buy on contract and then split up the price by the term for the payments, or is there interest you must figure in for that term and then split the principal and interest over the term for the payments? Thanks
- Thread starter OliverGuy
- Start date
Goose
Well-known Member
A contract can be anything that's agreed upon by both parties.
There can be a down payment at the start, a balloon payment at the end, or whatever. Most of the time the payments themselves, be they monthly, quarterly, semi-annually, annually, or whatever, are plugged into an amortization table by the amount of the principle and the interest rate, if there is any.
Like I said, a contract can be whatever two parties agree on, preferably in writing. There is no single "it's gotta be this way" contract.
There can be a down payment at the start, a balloon payment at the end, or whatever. Most of the time the payments themselves, be they monthly, quarterly, semi-annually, annually, or whatever, are plugged into an amortization table by the amount of the principle and the interest rate, if there is any.
Like I said, a contract can be whatever two parties agree on, preferably in writing. There is no single "it's gotta be this way" contract.
Goose
Well-known Member
Shoulda mentioned there can be all manner of contingencies written into the contract. One example of a contingency might be, "If So and So becomes unemployed, the payments are waived until such time as he is again employed", etc.
Contingencies can also be anything you want. Like, "If my Uncle Harry dies before your Aunt Elsie, this contract is null and void", or, "If either party to this contract dies of bubonic plague, the contract will be re-negotiated by his heirs", or whatever.
You get the idea.
Contingencies can also be anything you want. Like, "If my Uncle Harry dies before your Aunt Elsie, this contract is null and void", or, "If either party to this contract dies of bubonic plague, the contract will be re-negotiated by his heirs", or whatever.
You get the idea.
Anonymous-0
Well-known Member
There are some income tax implications if the buyer and seller are related. In those cases you should discuss the matter with a competent tax advisor, not some website guy.
Grain contracts? Auto? Machinery?
Probably property?????
Whatever both sides agree to.
If property with a long term pay scedule, it is likely in everyone's intrest to set up princple & intrest, as those have tax ramifications to both parties & best to have that sorted out from the get go.
Not totally sure what you are talking about tho.
--->Paul
Probably property?????
Whatever both sides agree to.
If property with a long term pay scedule, it is likely in everyone's intrest to set up princple & intrest, as those have tax ramifications to both parties & best to have that sorted out from the get go.
Not totally sure what you are talking about tho.
--->Paul
The usual practice is to decide on the sale price, interest rate and length of time, then plug those figures into an amortization table (or a magic calculator), and come out with the payment amount.
Example- $100,000 purchase price, monthly payments for 20 years, 5% interest, monthly payment would be $659.96. That first payment would abe $416.67 interest, $243.29 principal. Next payment would be $416.32 interest, $243.64 principal, and so on.
If you try to do it with no interest, the good ole IRS will "impute" interest to the seller, at about 4.8% on long term loans. So seller gets to pay income tax on interest, whether he actually gets it or not.
Example- $100,000 purchase price, monthly payments for 20 years, 5% interest, monthly payment would be $659.96. That first payment would abe $416.67 interest, $243.29 principal. Next payment would be $416.32 interest, $243.64 principal, and so on.
If you try to do it with no interest, the good ole IRS will "impute" interest to the seller, at about 4.8% on long term loans. So seller gets to pay income tax on interest, whether he actually gets it or not.
I sell a lot of stuff on contract. Everything has terms spelled out. Generally speaking, if its a year or less term I charge but dont assess interest unless the payments are late or the buyer runs long. For example, I sold serveral loads of hay this year 90 days same as cash. For the 90 days the payments are 10 percent of the balance due each month with a balloon at the end. Interest accures from day one at 18 percent APR which is maximum legal interest in my jurisdiction but, if the balloon is paid in full on time the interest is waived. If not or if they then need longer terms the interest has already been compounding.
On land sales where I hold the first mortage I charge prime plus 4 percent fixed with 25 percent down. For each percent less down adds one half of one percent to the interest rate. Since these are mostly building lots and I want them built on pretty quick they are set up with monthly payments on a 20 year schedule with a balloon at the end of 4 years to pay off the full amount.
On land sales where I hold the first mortage I charge prime plus 4 percent fixed with 25 percent down. For each percent less down adds one half of one percent to the interest rate. Since these are mostly building lots and I want them built on pretty quick they are set up with monthly payments on a 20 year schedule with a balloon at the end of 4 years to pay off the full amount.
Anonymous-0
Well-known Member
I would love to buy land on contact without interest being part of the equation ! Don't think it likely though, and I bet the IRS would be interested on what is going on.
Anonymous-0
Well-known Member
All the other replies are correct that you can agree to all most anything - except - real estate is usually a special case. You really need to know what your state requires for a contract for sale of real estate - especially residential where there is some consumer protection. Commercial contracts would not have those problems.
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