Buy Expensive House Elderly – Letter to CPA

Dear [CPA Name],

I am writing to you as the tax professional for [Seller Name], who owns a principal residence valued at approximately $1,000,000. I have presented a purchase proposal to your client and want to provide you with a full analysis of the tax implications so you can advise them properly.

The Proposed Structure

Rather than a traditional sale, I propose:

• $200,000 cash down payment from a private lender
• $800,000 seller-carry note at market interest
• Lease-option exit to a high-income professional (young doctor or lawyer) with 7% down and a 60–120 month term

Comparison: Traditional Sale vs. Structured Sale

Factor	Traditional Sale (Agent)	Structured Sale (This Proposal)
Sale Price	$1,000,000	$1,000,000
Agent Commission	$50,000–$60,000 (5–6%)	$0
Closing Costs	$20,000–$50,000 (2–5%)	Minimal
Net Proceeds at Closing	$890,000–$930,000	$200,000 cash + $800,000 note
Capital Gains Tax	Potentially immediate on gain over $500,000 exclusion	Spread over installment payments

The Section 121 Exclusion

Under IRC Section 121, a married couple filing jointly can exclude up to $500,000 of capital gain from the sale of their principal residence (or $250,000 for single filers). Assuming your clients purchased the home decades ago for, say, $150,000, their adjusted basis may be low.

Traditional Sale Scenario:

Sale Price	$1,000,000
Less Selling Costs (6% commission + 2% closing)	($80,000)
Net Amount Realized	$920,000
Adjusted Basis	($150,000)
Taxable Gain	$770,000
Less Section 121 Exclusion	($500,000)
Remaining Taxable Gain	$270,000

At a combined federal and state capital gains rate of ~25%, that’s approximately $67,500 in immediate tax liability.

Structured Sale Scenario (Installment Method):

Down Payment	$200,000
Note Balance	$800,000
Total Contract Price	$1,000,000
Gross Profit Percentage	77%
Year 1 Taxable Gain	~$154,000 (77% of $200,000 down)

The remaining gain is recognized only as principal payments are received, spreading the tax liability over 5–10 years.

Medicare IRMAA Protection

This is critical for your clients. A large capital gain spikes Modified Adjusted Gross Income (MAGI), which determines Medicare Part B and Part D premiums two years later through the Income-Related Monthly Adjustment Amount (IRMAA) system.

For 2026, the first IRMAA tier for joint filers begins at $218,000 MAGI. A $770,000 gain in a single year would push them into the highest tier, costing $487+ per person per month in Part B surcharges alone — over $11,000 annually for a couple.

By spreading the gain through installment payments, their annual MAGI remains lower, potentially avoiding or reducing IRMAA surcharges entirely.

Medicaid Spend-Down Considerations

For seniors who may need long-term care coverage in the future, the timing and structure of a home sale affects Medicaid eligibility through the five-year look-back period. A structured installment sale creates ongoing income rather than a lump sum that must be spent down, which may provide more flexibility in planning.

Benefits to Heirs

If your clients pass away before the note is fully paid, the remaining note payments pass to their heirs. The heirs receive the note at a stepped-up basis equal to fair market value at the date of death, potentially eliminating capital gains tax on the remaining gain. The cash flow continues to the family.

The First Note Sale Strategy

The $800,000 seller-carry note can be structured as two notes: a first note at 85% of the balance and a second note at 15%. After seasoning the first note for 12–24 months with documented payments, it can be sold to a note investor, providing your clients with additional liquidity while retaining the second note for ongoing income.

Summary Comparison

	Traditional Sale	Structured Sale
Immediate Cash to Seller	$890,000+	$200,000
Ongoing Income	None	Interest + principal payments
Capital Gains Tax (Year 1)	~$67,500	~$38,500
Medicare IRMAA Impact	High (one large spike)	Low (spread over years)
Commission Paid	$50,000–$60,000	$0
Heir Benefit	Lump sum inheritance	Ongoing cash flow + stepped-up basis

Recommendation

I recommend you review this structure with your clients and advise them on the specific tax consequences for their situation. The installment sale method under IRC Section 453 provides a legitimate, IRS-approved way to spread capital gains and manage Medicare premium impacts.

I am happy to provide any additional documentation you require and to coordinate with you on the closing timeline.

Respectfully,

Mr. Investor
Real Estate Investor
[Phone] | [Email]

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Sources & References

1. IRC Section 121 — Principal Residence Exclusion
   IRS Publication 523: Selling Your Home
2. IRC Section 453 — Installment Method
   IRS Publication 537: Installment Sales
   26 U.S.C. § 453 — Installment Method (Cornell LII)
3. IRC Section 483 — Interest on Certain Deferred Payments
   26 U.S.C. § 483 (Cornell LII)
4. Medicare IRMAA — Income-Related Monthly Adjustment Amount
   Medicare.gov: Medicare Costs
   SSA.gov: Medicare Premiums
   CMS.gov: 2026 Medicare Parts B Premiums and Deductibles
5. Medicaid Five-Year Look-Back Period
   Medicaid.gov: Eligibility
   42 U.S.C. § 1396p — Liens, Adjustments and Recoveries (Cornell LII)
6. Stepped-Up Basis for Inherited Notes
   IRS Publication 559: Survivors, Executors, and Administrators
   26 U.S.C. § 1014 — Basis of Property Acquired from a Decedent (Cornell LII)
7. Note Seasoning and Note Sales
   Legalwiz.com — Bill Bronchick Resources
   REISkills.com — Brian Gibbons Training
8. Garn-St. Germain Act — Due-on-Sale Exceptions
   12 U.S.C. § 1701j-3 (Cornell LII)
9. Private Lender Gap Funding
   REISkills.com — Private Lending Resources
10. Seller Financing and Lease Option Regulations
    CFPB Regulation Z — Truth in Lending (12 CFR Part 1026)
    Dodd-Frank Wall Street Reform and Consumer Protection Act

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Disclaimer: This letter is for educational and informational purposes only. It does not constitute legal, tax, or financial advice. All parties should consult their own licensed attorney, CPA, and financial advisor before entering into any transaction. Tax laws are subject to change and vary by jurisdiction.