An investor is considering selling a property that has an adjusted basis of $1.5 million for $2 million. The property has a loan balance of $1.75 million. She is exploring different disposition strategies. All capital gains would be taxed at 20 percent (whether from depreciation recapture or price appreciation) and ordinary income would be taxed at 35 percent.
a. Suppose that the property is sold using an installment sale with the buyer assuming the loan and making a payment of $50,000 at the time of sale and then installment payments of $50,000 per year for the next four years. Interest at a rate of 7 percent would be charged on the unpaid balance due the seller. Is this better than a cash sale?
b. Now suppose that the investor is considering doing a tax-deferred exchange rather than an installment sale. She would acquire a second property for $4 million and assume a loan for $3,750,000. She believes that the land would be about 20 percent of the purchase price and the building would be about 80 percent. If she does the exchange, she plans to sell the second property after five years. It would be depreciated over 39 years. Is the exchange strategy better than just selling the property for cash and then purchasing the second property?