Im working on an off market apartment complex with an owner. I know he wants passive income and I wanted to provide that value for him.
So far I have these Benefits of Seller Financing:
- Higher Price: I can pay more because I can get a 30 year term from you, but a local bank will only give me 25%. Also it is too small for agency debt.
- Unless you have a higher and better use for the money. After capital gains, broker fees, long inspection periods, re-trades, etc. you will end up with way less.
- Installment sale will net you more future yield.
- You only pay gains on the extent you receive payment each year.
- Faster closing: Banks and lenders take months!
So I put this in 1031 because I have a question.
-Is this correct: Does the seller only pay capital gains tax on the principle payments he receives from me?
-And can he 1031 that money? The reason I ask is because of this link I found, where it says a contract sale will work? https://www.1031exchange.com/opportunity-seller-financing/
Thanks ahead of time!
I have studied, looked at, and considered doing normal 1031 exchanges and even reverse exchanges in the disposition of my own properties. I looked into installment sales. But this deal of yours, of mixing the two is awfully confusing.
I know an investor whose niche is doing deals with older, retired property owners, usually mortgage free properties that they owned for a long time, has too much capital gains, and want heirs to inherit on their death to get the stepped up bases.
He uses Long term triple net lease as his vehicle of choice. From experience, my dad owned a commercial property, bought it in 1963 for less than $25K, invested $5K down, rose to $250K in 1982 and paid off, and had unsolicited investors pestering him with deals. At first, he was all excited. He spoke to me about them. but what you are proposing is so hard to understand and if you were proposing it to my dad, I would tell him, forget it, at the end of the day, you don't know how it'll turn out. Sounds like some of the deals offered my dad.
Investors were proposing to pay more than market, but I told him, commercial properties had gone up tremendously, all you have to do is wait a year or two, the over market premium will seem like nothing. He agreed, kept it, passed away a few years ago, and the property sold for over a millions and a quarter, with his heirs inheriting it on a stepped up basis.
The investor who does Long Term NNN leases say he tries to make things simple for these older tired property owners. They just need someone to manage their properties, and with an NNN lease, they get passive income, and pays no capital gains. In other words, everything they want and need. They don't need a tax lawyer to figure it out the deal.
@Scott Hollister , Whether an owner carry note can work with a 1031 exchange or not is totally up to the financial strength of the seller.
When they agree to carry back a note that note becomes part of the proceeds of the sale. So it must go into the exchange account and be used in the next purchase if the seller wants tax deferral. However no seller of a property is likely to accept that note as part payment of the replacement property. So the client can sell that note on the open market and then replace the note with the cash in the exchange account. This typically requires a substantial discount on the sale of the note since it is unseasoned. So usually that 's a non starter as well.
But if the seller has a strong cash position outside the exchange. Or if they have access to cash from anywhere. They can bring in cash from anywhere and replace the owner carry note. By doing this their exchange account is now all cash so the 1031 can be completed and all tax deferred. And outside their exchange account they now have a note that is tax free other than the interest coming in.
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