Holding the note to defer the capital gains.

Upstate New York, New York
Buying & Selling Real Estate
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Holding the note to defer the capital gains.

Tylere WeaverPro Member
Rental Property Investor · upstate new york · Member since 2023 · 54 posts · 10 votes

Looking to sell a property that I ownnfree and clear.  It's a mixed use property.  I have a tenant in the restaurant and a tenant in the upper apartment.  

I would like to sell the property to the restaurant operator and they are willing to buy. 

i want to hold the paper on it to get the interest and what I'm hoping for is deferring the capital gains taxes until the balloon payment would be due in 5 years. Then 1031 exchange.  

has anyone else done this before?  

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y

@Tylere Weaver

If you sell now and seller finance it I do t believe you can then do a 1031 later as the property was already sold.

Check with your intermediary- there are several here on BP you can engage with. I have found they are worth the $

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y

    @Tylere Weaver

    If you sell now and seller finance it I do t believe you can then do a 1031 later as the property was already sold.

    Check with your intermediary- there are several here on BP you can engage with. I have found they are worth the $

    7e investments53 Reviews
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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    As Chris mentioned:  if you well today you can’t sell 5 years from now. You’re going to take 95% of the tax hit you’d take today, in 5 years. (Minus the small percent of the payments they’ve made that’s been considered capital gains.)

    My understanding is the 60 payments they make will be split up in to interest (regular taxes), capital gains (15% usually), and principle pay down (non-taxable.). That same ratio will apply when they pay you off. 

    The only way I know of to do a 1031 would be to do e exchange today. And then while it’s in the process you provide your QI will all the cash needed to finance the property. (Basically you have to have your selling price laying around in cash to lend to the buyer.)

    You could try something like give me X (10-20% of the selling price.) and then make ent payments of “Y”. (Higher than normal rent.) and I will give you the option to buy the property in 5 years for selling price minus x, maybe minus some of Y. 

    You’ll have to ask @Dave Foster if that would be allowed…

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Bill B.and @Tylere Weaver, A lease with an option to purchase is a very good idea to give yourself the option to do the 1031 exchange later.  Just make sure it is a lease and not an arrangement that could be seen as a land contract.  You retain ownership and responsibility for the property.  They get to use it with an option to purchase it later.  And that is when you would do the 1031 exchange.

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