Seller Financing and Tax Issues

7 Replies

Hello.  I have an individual that is opened to selling me their current duplex portfolio, consisting of around 7-10 duplexes.  I was attempting to work with him on some sort of seller financing option as he would be open to it.  The problem that we are running into is that he would get hit really hard with the capital gains tax once sold and is wanting to hold onto until he passes so that his wife will benefit from the step up basis at his time of death.

Does anyone have any ideas or solutions that I could possibly present or offer that would work best for something like this prior to the owner passing that would benefit him tax wise or at least bring it down quite a bit while obtaining the portfolio?

Thanks in advance.

@Chris Rightmyer the best tax situation is selling after he dies at stepped up basis. That assumes he is the sole owner and that he dies before his wife.

One argument to sell now is to reduce stress in old age. Since he cares about his wife, the advantage of selling now is he doesn't leave his wife to deal with managing or selling the properties. Death of a spouse is very stressful, so why leave her to deal with rental properties?

Seller financing will allow him to spread his tax burden over a number of years, so although he pays taxes, it is not all at once. 

Play off his emotions and I don't mean this disrespectfully. He worked hard to build a rental empire and he earned the right for stress free living. Seller financing is truly mailbox money. He just cashes the check every month. No late night calls, no insurance, taxes, tenant placement or any of the drama. Instead of worrying about a few bucks after he passes, spend the time with his wife while he is alive. Set her up to have no worries after he dies.

Reassure him that you are young investor, hoping to enjoy his success in old age. People sell for other reasons besides money. If he can bond with you, it will make letting go easier. I suspect this isn't about the money, it is him having trouble letting go. Be patient and low pressure.

So even if it is not an outright sale, the seller will still get hit hard with Cap gains tax?

It has always been my understanding that owner financing is one of the ways to lessen the burden of cap gains tax and one of the main benefits to the seller.

I could be wrong, would love to hear some others advice.

-BA

Thanks Joe, I appreciate the advise and will certainly take this into account when speaking with him again.  I believe he is the sole owner of all of these properties and has just recently started having some health issues, which is why I think he would be open to options potentially before, or even an arrangement after he passes if not selling right now.  Thanks for the help.


Originally posted by @Joe Splitrock :

@Chris Rightmyer the best tax situation is selling after he dies at stepped up basis. That assumes he is the sole owner and that he dies before his wife.

One argument to sell now is to reduce stress in old age. Since he cares about his wife, the advantage of selling now is he doesn't leave his wife to deal with managing or selling the properties. Death of a spouse is very stressful, so why leave her to deal with rental properties?

Seller financing will allow him to spread his tax burden over a number of years, so although he pays taxes, it is not all at once. 

Play off his emotions and I don't mean this disrespectfully. He worked hard to build a rental empire and he earned the right for stress free living. Seller financing is truly mailbox money. He just cashes the check every month. No late night calls, no insurance, taxes, tenant placement or any of the drama. Instead of worrying about a few bucks after he passes, spend the time with his wife while he is alive. Set her up to have no worries after he dies.

Reassure him that you are young investor, hoping to enjoy his success in old age. People sell for other reasons besides money. If he can bond with you, it will make letting go easier. I suspect this isn't about the money, it is him having trouble letting go. Be patient and low pressure.

 

@Blaine Alger Thanks Blaine.  I believe he was worried about the capital gains on an outright sale, correct.  My intention was to lessen the burden as you mentioned by offering owner financing, but with his basis in the property compared to what they are valued at now, the gains would still hit him harder than most.  Was just curious if there was some other creative options that someone had potentially that I am not aware of.  Appreciate the response.

A correctly structured installment sale should spread the taxes out over the payment period.  Depending on his tax situation, that could enable some of the gains to be taxed at 0% long term capital gains rate. I would find a good CPA and/or real estate attorney who understands these.

@Chris Rightmyer You only pay taxes on money you actually receive. So, in a seller-finance scenario, the seller would only pay taxes on any down payment received, and monthly payment received

I can't answer the part of your question about the step up basis :)

You could extend out the term potentially for multiple years beyond what they originally wanted. That could potentially defer some tax out a few years but it's best to talk with the CPA for the ins and outs of this transaction. And of course attorneys.