It’s the time of year where some people are joyful and others are trembling.
It is tax time!
If you find yourself being a tremblor, take a look at Peter’s situation:
Peter is a businessman, real estate investor and stock investor. His wife is Principal of an elementary school. Peter’s CPA called him with some bad news. After taking every deduction available on his tax return, he still owes the Feds $50,000.
As a business guy, Peter is used to dealing with bad news. He is also accustomed to pivoting when the situation requires it. He quickly huddled with his wife and examined their options. This is what they came up with:
- Sell stock
- Use credit cards
- Home equity loan
- Cash in CD
- Other?
In our conversation, Peter said he and his wife quickly eliminated borrowing money. They both had strong incomes and could pay the debt down quickly, but they abhorred personal debt. The CD was a cash cushion each of them liked – just knowing it was there gave them comfort. If push came to shove they would cash it in, but preferred not to. Peter’s stock portfolio has done well in recent years and he might be willing to sell a few stocks. The couple also held a promissory note on a very nice home they built years ago, loved their buyers, received a big down payment, and enjoyed the steady income. They had no interest in giving it up.
Peter said they talked to their CPA, Attorney and Broker picking their brain and looking for ideas. Could I add to the conversation?
When pressed, Peter said they were leaning toward selling some stock as the least painful option. As we talked about the note, Peter shared he had an unpleasant experience with a potential note buyer, so he could not see that person working with his buyers. It made him wary of selling their note to a stranger. I finally said I understood. But, what about this idea?
I suggested he consider selling part of the note – not all of it. Sell a stream of payments that gives you the $50,000 needed. This way, he is not out of the note forever, and both he and his buyers will know exactly when Peter will “come back in” and take up payments again.
He was intrigued. I put it together. This is what it looked like:
Peter’s note was for $200,000 @7% for 240 months with a monthly payment of $1550.60. 12 payments have been made, so the current balance is $195, 242.37.
If Peter sold approximately the next 41 payments he would receive $50,000 today. The investor, after receiving the 41 payments, would then assign the note back to Peter and his wife, who would receive all remaining payments. The note balance at that time would be roughly $176, 236. So, Peter and his wife give up $19,000 principal in exchange for $50,000. If this is the best option available, Peter chooses this option. If Peter and his buyers are comfortable with us as the investor, he chooses this option. Otherwise, he sells some stock.
What would you do?
