Using land contract to buy from seller who is upside down, or has captial gains....

5 Replies

Hi All:

I want to validate the following:

If I use a land contract to buy a house, with Subject To existing financing, from the seller, and the seller is upside down, meaning he owes more than the current appraise value of the house, would you recommend financing the negative equity for the seller, for a low interest rate, to pay off in say a year? What other costs do you expect in this scenario for the seller or myself, the buyer, to pay?

Second, if the seller bought the same house, for example, for 100K, 10 years back, and than the market value went up to 200K, and he took a LOC for 70K, netting his current outstanding debt of 170K, if I utilize a land contract to purchase the house from him, will he still be subject to pay for capital gains on the 100K, if the current market value is 200K? I presume yes, but just validating with the experts!

Thanks in advance!

You expect the owner to pay you for the negative equity?

Value has nothing to do with cap gains, only his basis, adjusted for capital iimprovements and depreciation,verses proceeds received from the sale.

Originally posted by @Rohit Jindal :
Hi All:

I want to validate the following:

If I use a land contract to buy a house, with Subject To existing financing, from the seller, and the seller is upside down, meaning he owes more than the current appraise value of the house, would you recommend financing the negative equity for the seller, for a low interest rate, to pay off in say a year? What other costs do you expect in this scenario for the seller or myself, the buyer, to pay?

Second, if the seller bought the same house, for example, for 100K, 10 years back, and than the market value went up to 200K, and he took a LOC for 70K, netting his current outstanding debt of 170K, if I utilize a land contract to purchase the house from him, will he still be subject to pay for capital gains on the 100K, if the current market value is 200K? I presume yes, but just validating with the experts!

Thanks in advance!

That will greatly depend upon whether the property was an investment for them or a primary residence. If it was a residence it will not be an issue. If it is not a residence then Yes, they will have capital gain AND recapture to deal with. But those are not your problem, that is something they need to figure out with their accountant. Do not try to explain it to them as it can be very costly if you do not explain it correctly.

The sales price/proceeds determine cap gains tax, not the "value", or what it may be worth.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here