Hey BP!! I am trying to get into a deal right now as a newbie but need some advice/suggestions from all you experienced members, I would really appreciate it please. I am in talks with my landlords right now to buy the SFH we are currently renting from them. The husband is 85 and the wife is 81 and they have said they are willing to sell. Just yesterday though, the husband let me know that they spoke with their financial advisor and were advised to not sell their home now (due to tax implications/capital gains) but wait until one of them passes away and do an estate sell instead. This would allow them to keep their monthly cash flow and apparently give them some tax benefit. I have no idea what the tax benefits of an estate sale would be for them, but I am wondering if some sort of selling financing deal would give even better tax benefits to them as the sellers. Sounds like their concerns are keeping their monthly income and reducing their tax liabilities. Can anyone help a newbie out?
Hi Tyler -
Their advisor is referring to the step up in cost basis when they pass away.
To make this easy to understand, let’s assume they bought the property 20 years ago for 50,000, and the value now is 200,000. If they sold it, they have to pay capital gains tax on 150,000, or approximately 22,500-30,000 depending on their income level.
If they wait until they both pass away, the new taxable value is based off of what the property was worth on their date of death. So if they both passed away today, the new basis would be 200,000. Their heirs could then sell the property for 200,000 and not pay any capital gains whatsoever.
You could always try to find something that would be more valuable to them than their cost basis, or try to add value to them above and beyond what they would pay in taxes. Or maybe a lease option that would be executed upon their passing? Hope this helps you to understand the concept a little better!
@Josh E. Thanks for the quick reply! Your simple example was perfect to help me understand how the taxes would change in the event of their deaths. I also appreciate the ideas you gave! When trying to find ways to add more value to them, do you have any other examples you could suggest? It seems anything to do with extra $$ would not help as it would just increase the taxes the would pay?
Did not know this and this is valuable information for my outfit. Thanks for posting, Josh.
@Jim K. Yes I agree, super helpful information!!
Can anyone shed some light on how taxes work for seller financing from the seller's perspective?