Should I owner finance my house to my tenant?

6 Replies

This is not my only rental, but the only one in an HOA. The tenant has a bankruptcy and I took a chance on them with a higher rent + double the deposit. They have been great overall, I don't have to worry about them going anywhere on account of their large number of pets and credit situation. They've been there 4 years.

I had talked to them a while back about owner financing the house to them years ago. I figured it would save me a lot on realtor commissions...

Sooooo....they asked about price and terms today. The house is worth about 500k. I owe about 215K on it. I bought it for 300K with 20% down about 6 years ago.

1) SHOULD I even do this? I thought about moving into it again for a low cost place to live in a nice neighborhood and maybe cash out refinancing it (with a lower interest rate to boot) and maybe eventually renting it back out and maybe 1031 exchanging it at some point. It's a newer house so cap ex is far off.

2) What are the benefits of me doing this? I feel like I lose the ability to cash out refinance it and am just becoming the bank to them. Which leaves 285K of equity sitting there until they pay off the sale price after 30 years.

3) It feels like for my personal situation/goals it may not be to my advantage to do this. I figured I would eventually do a 1031 exchange on it and do what I usually do, sell one house and buy 2 more with the money.

We recently sold one of our rentals to the tenants. We typically don't sell cash flowing assets but this created a nice more passive income stream.
If you can live in the property two years to take advantage of that tax break, that may be a better long term option for you.
Would this be some kind of wrap mortgage if you move forward?

We recently sold one of our rentals to the tenants. We typically don't sell cash flowing assets but this created a nice more passive income stream.
If you can live in the property two years to take advantage of that tax break, that may be a better long term option for you.
Would this be some kind of wrap mortgage if you move forward?

Originally posted by @John Teachout :

We recently sold one of our rentals to the tenants. We typically don't sell cash flowing assets but this created a nice more passive income stream.
If you can live in the property two years to take advantage of that tax break, that may be a better long term option for you.
Would this be some kind of wrap mortgage if you move forward?

Can't do the capital gains exclusion as primary, as I noted "They've been there 4 years" so I'm past the 2/5 year rule, which would only apply if it was a rental for 3 years. If I move back in I'd have to live there for a long time to get the prorated capital gain on the sale to a very small amount. Hence why I wanted to move back in and do a cash out refinance...then do a 1031 exchange...

 

If you move in and live in it for two years, you meet the 2 out of 5 criteria. That's not too long of a time considering the potential tax savings.

Originally posted by @John Teachout :

If you move in and live in it for two years, you meet the 2 out of 5 criteria. That's not too long of a time considering the potential tax savings.

That's not the way it works.

Updated 9 months ago

https://www.biggerpockets.com/forums/51/topics/666857-will-i-owe-capital-gains-tax-if-i-move-back-and-sell

Updated 9 months ago

You don't understand the 2/5 year rule, it's not absolute. LIKE I SAID IT IS PRO RATED AT THIS POINT. PLEASE STICK TO THE ORIGINAL QUESTION RATHER THAN GIVING BAD TAX ADVICE.

@Jack B. , you're correct in that I did not have an understanding of the 2/5 rule in your situation. I read up on it some and it's pretty complex when switching from personal use to business use and back again. I shouldn't have commented.