In this Q&A Thursday episode, Chris Prefontaine addresses a recurring question about whether principal‑only payments in owner‑financed (sub‑2) real‑estate deals trigger IRS imputed‑interest rules. He explains that while the tax code does impose imputed interest on certain loans, a number of exceptions apply that are highly relevant to typical real‑estate transactions. The key exceptions include: loans of $10,000 or less, compensated related‑party loans (employer‑employee, contractor‑service provider), loans between a corporation and its shareholders, gift loans, sales of farms or small‑business properties for $1 million or less, sales of principal residences, and deals where the total payments are $250,000 or less. He cites the guidance from his CPA, Paul Dion, including historical imputed‑interest rates (approximately 0.88%–1.99% for 2017). Chris advises listeners to prioritize advice from tax specialists over attorneys when the issue is outside the attorney’s expertise. He also promotes the community’s learning resources: the free weekly “Wicked Smart Sit Down” sessions, the YouTube series (Q&A Thursday, Motivational Monday, Deal Structure Sunday), and the annual live events (QLSLive.com and WickedSmartSummit.com). Finally, he encourages viewers to reach out with questions via support@smartrealestatecoach.com.
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All right, welcome to another Q&A Thursday. You know, this has come up, this one question has come up, I don't know how many times since we started the company, but I would say every quarter it comes up. And it usually comes from a student, and it usually is, is coming from either an attorney or a seller to the student. And here's the question. I'm literally going to paraphrase what the student said to me in Slack. He said, I was told that principal-only payments are not allowed, that there's imputed interest. Now please, disclosure, I'm not a tax specialist, I'm not a CPA, I'm none of that. I'm just telling you what our CPA has given us, and you can Google it. So this has to do with we go out, we type a property like this building I'm standing in, and the owner's free and clear, and we structure principal-only payments. Let me just keep it simple because we do all kinds of sub-2s with owner financing, but you're going to make payments monthly to the seller, principal only. Okay, now the IRS does have— the IRS code does have imputed interest on below— like, they have imputed interest, but there's exceptions to all, all the— all their code. In our library of necessary data for associates, we call it Linda. We have the literally the chart that Paul Dion, our CPA, gave us. Okay, some of the exceptions with this imputed interest thing, like the rules don't apply. In other words, if the loans between parties are like ten thousand or less, I'm talking about small stuff, not real estate. They're also compensated related loans between employer employee or between an independent contractor and a person. Who provide services, those aren't— there's no compute interest on those. Loans between a corporation and its shareholders, this, that doesn't apply there. Gift loans. The other exceptions that do apply to you guys that you want to know though, that really fits most of our deals, are sales for $1 million or less of farms by individuals and small businesses, sales of principal residences And sales involving payments of $250,000 or less. Those 3 exceptions are pretty major because I know— and if you're wondering, what is this imputed interest anyway? What if they did, you know, that one of my deals, let's say, was, um, I don't know, $2 million. And let's say I'm right and Paul was right and there is imputed interest. I don't have the rates recently. I have in front of me 2017. And they were in the like 0.88% to 1.99% range depending on your term. So all this to say, don't listen to the attorneys, listen only to the tax specialist. Because my own attorney, who's a senior partner at the law firm I've been using for years and years here, 20 years, said to me, oh, I think you have imputed interest on these things, you better check that out. I said no, chat with my CPA, and my CPA provided this list. And he And he said, oh, interesting. So now he does all our deals, no problem. So case in point, when someone's not in their lane of specialty and they don't know, they'll tell you that. Or a seller, if they're— if they think they're a little bit more advanced, they may tell you that. Don't get caught up in the imputed interest as long as you're staying under $1 million, principal residence, under $250,000 in payments, some of these things I said. Now, if you want to learn more about this stuff, guys, I'm just giving you— these aren't like exciting Q&As, but they're important Q&As that come up in our community all the time. If you want to just come hang out with us weekly on our Wicked Smart Sit Down, they're free. And you can bring any questions you want. You can watch a deal we're doing, ask questions about that, or you can just bring questions like this. I mean, I literally just printed it off the computer because someone sent it to me. And we'll be happy to answer you. I'm on there, my son-in-law Zach's on there, Nick's on there, my son. Our coaches are on there every Thursday, Wicked Smart Sit Down, 4 PM Eastern Standard Time. Now, In addition to that, I always want to give you free stuff on YouTube right here. There's an— you are watching the Q&A Thursdays, but there's Motivational Mondays and there's Deal Structure Sundays. There's over 200 deals. I don't know if it's 250 yet, but there's a lot of deals on there for you to look at. I would encourage you to make it a priority to subscribe and then share these videos with anyone else in the industry because they can glean a lot from those 3 different categories: the Q&A Thursday, Motivational Monday, and Deal Structure Sunday. Last but not least, we'd love to see you at our live events. It's the only way you're going to really peer into the community. Virtual is great, but the only way you're going to really see what the community is about and rub elbows with people just like you— and I don't care who you are, I promise you, you'll get in that room and somebody will have your background, your challenges, your wins, your game plan, job, no job— you'll find someone just like you, and because of it, your life will change. Go to qlslive.com if you're seeing this before September, and if you're seeing it after September, Go to wickedsmartsummit.com. Those are the 2 yearly events we run. Look forward to meeting you in person. I guarantee you're gonna consider it time very well spent. If you have questions, send them to support@smartrealestatecoach.com. Make it a great week. See you next week.
