non-judicial foreclosure cap gains tax vs. no foreclosure?

non-judicial foreclosure cap gains tax vs. no foreclosure?
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My brother and I have an inherited piece of property. My father sold the Note and became the “bank” back in 2012 to generate income to pay for medical expenses. Currently, the person who pays us a monthly check stopped paying for January, and was late on his payments twice in 2018, and did not pay the penalty late fee. In addition, this person also changed the name on the note to a different company back in 2016, without notifying us. For these reasons, my brother and I have decided to initiate a non-judicial foreclosure, which requires them to pay the note in full, which is about $1 million.

HOWEVER, we will be taxed on this $1 million at 34%, which seems like a lot to have to pay in taxes! We are not eligible for a 1035 exchange because my father did not initiate that at the sale in 2012.

The other option we have is to negotiate with the owner and allow them one more chance to redeem themselves by paying on time, or setting up direct depost, etc. According to the schedule, we would receive monthly payments from them for 18 more years until the mortgage is paid off.

My question is - which is a better financial decision - from a pure monetary standpoint? Are we paying more (or less?) in taxes by taking the lump sum vs. paying taxes on the annual interest, or is it a wash? Which is the more financially advantageous decision, and is there a big or small difference?

Thanks in advance for your help…


Hi, @helari, and welcome. The 34 percent rate you mentioned–that’s 20 percent federal and ~14 percent state, right? States like California don’t offer a different lower rate for capital gains, so I’m guessing you’re either here in the Golden State or somewhere else with high tax rates.

First, the disclaimer. If I were you, I’d hire a tax pro. They live and breathe taxes, plus they have insurance that covers damages if they give you the wrong advice.

In general, though, it’s often better to stretch out the capital gains if that allows you to stay below the top rates. Most people pay federal capital gains rates of 15 percent (or even 0 percent, for those in the bottom federal income tax bracket). You’d obviously have to weigh that against the costs of foreclosing/taking back the property.

With so much money at stake, though, it’s worth it to find a CPA who has experience with real estate in your area who can guide you. You can get referrals at


Thank you for your remarks. Yes, I am in California and yes, that is how I came up with the 34%. My problem is that I’ve not only consulted with my CPA, but other CPAs and neither has given me specific information as to which is the better financial option.

I did speak with a financial advisor who told me that I was making 3% annually on my investment so if I thought I could do better than 3% I should move forward with the foreclosure. I don’t really know how he got this 3% number. The note is getting paid off at 5% annual interest until 2037.

As for the option for capital gains taxes to be stretched out over 18 more years, my husband is of the opinion that there is no way to know since tax laws will change over the years, and they will probably go up.


Your husband’s right: taxes are always changing, and are always going up for somebody!

That 3% number is kind of a rule of thumb thing, not really a reflection of your individual circumstance.

I would be tempted to look for a CPA/PFS. That’s the type of financial planner who is an expert in taxes (they’re certified public accounts), but who also has education and experience with comprehensive financial planning (the PFS stands for personal financial specialist). This credential is very similar to a CFP. A tax pro knows taxes, in other words, but the decision you face requires a broader understanding of your circumstances, goals, etc. you can search for one here: