Balance of Sale Financing: Selling Something That Isn't Paid Off
Sometimes, we tend to get ambitious with our buying habits. Although the loan for a car or motorcycle seemed manageable when you originally purchased it, circumstances change and you may need to sell something you own before it's paid off. Balance of sale financing is one alternative available to carry you through these types of transactions.
Selling an Item that Isn't Paid Off
Your lender can help guide you through the process of selling an item before you've paid it off. If you're planning on paying off the loan early, request a payoff balance to make sure you know exactly how much you owe, including interest. You'll also want to review your loan documents to determine when you can pay off an item early, whether any fees are involved, and if you need bank approval prior to a sale.
Clearing the Title
One issue that may arise when selling a personal asset that isn't paid off involves the transfer of a clear title. If the title cannot transfer due to an outstanding loan secured against the asset, this will prevent a sale from taking place. One solution includes obtaining a balance of sale financing through a personal loan or line of credit. After the sale goes through, the proceeds may be returned to your savings account or used to pay down the unsecured loan. In these situations, you should allow for enough time to obtain the new loan or transfer funds to pay off existing debt — ask your lender how long this will take before you move forward with a sale.
Adjusting Your Budget
Prior to the sale of a financed car or boat, you should look over all of your financing or payment options to determine the impact on your monthly household income. If your monthly payments change, add or subtract the new amounts into your budget and calculate the difference in spending. Although you may need to shoulder an additional financial burden in the short-term by arranging to pay off a loan early, the additional cash outlay may be worthwhile to help secure your financial security in the future.
Calculating Tax Basis
When you sell a personal asset that results in a taxable gain or loss, you'll also need to determine the tax reporting consequences. The IRS offers guidance on calculating the tax basis of an asset and the resulting gain or loss. The gain or loss is generally the difference between the tax basis and what's known as the "amount realized" from the sale. Your tax basis will typically be computed as the amount you originally paid for the item, plus the cost of any improvements you made to the item — minus any depreciation. Keep in mind, the amount realized from sale may include more than cash; for example, if the buyer assumes your debt as part of the sale, the amount will be factored into the calculation of your gain or loss. If you have questions about the sale of a high-priced item like a car or boat, don't hesitate to seek advice from a tax expert.
Any time your financial situation changes, it's a good idea to sit down and go over any changes to your household budget. If you'd like to find out more about restructuring your monthly payments, talk to your financial advisor for advice on how to consolidate debt, redirect savings, or pay off loans that are costing you the most in interest.