Anyone familiar with 0% seller financing?

Question

Hello,This is my first deal.I am in the process of negotiating a seller financed sale of a house that he inherited from his late mother, it needs work and he does not have to time to fix it up. The seller is more focused on the actual sale price of the property than the terms. He wanted a higher sale price with 0% financing, and the monthly numbers still work for me. I was advised today by a real estate attorney that the IRS will tax the seller / require him to charge a minimum amount of interest for financing. Does anyone have experience in this area? Is 0% financing possible if that is what the seller wants to do?Any recommendations for real estate attorneys / title companies in the Minneapolis area that are familiar with seller financing. Thank you!

Daniel Anshus · Answer

@Matt Frazier I would speak with @John Woodrich about this

Wayne Brooks · Answer

@Matt Frazier yes, it’s possible but the seller is going to pay taxes on an interest rates imputed by the irs…you can probably google up the irs imputed rate, it varies in relation to market rates.

Mike Flynn · Answer

Hey Matt,

I believe when Bob mentioned servicing company, he was talking about a company you hire that collects and distributes the monthly payment, and deals with all the documentation and recording of payments, as well as any notices for late payments, etc. Basically a middle man for your private loan that handles all the stuff you don't want to handle, but really need to have. I've heard it ranges a little, but is somewhere around $20/mo. Listen to BP Podcast #527 - they talk about seller financing/loan servicing a little and that might make more clear than I can. Plus it's just a really informative episode. Personally, I would jump on the opportunity to do 0% rate and pay a little higher sale price (assuming the numbers worked like you said) - it's actually what I'm currently on the hunt for.

Good post and good luck with the property!

John Woodrich · Answer

As mentioned - seller will report interest income on the deal likely at the AFR rate. With that being said - if you structure the purchase at the AFR rate then you would get an interest deduction whereas you otherwise wouldn't... If you are flipping it wouldn't matter.

Seller has to deal with their own tax consequences. If they claim 0% they are missing out on income they should be reporting.

Bob E. · Answer

@Matt Frazier The one drawback to you is that you will not get an interest deduction but you will get a higher depreciation. Make sure you set up the loan with the servicer so that all your payments are documented.

Jesse Hopcus · Answer

Wow very interesting would have been a good thing for all the so called gurus to tell us. I have never herd of that in all the research I have done. I can see how that could change the dynamics of the deal. Good post !

Matthew Palumbo · Answer

Thank you all. This is very helpful information. I'll present this to the seller and advise him to consult with a tax advisor before we proceed.

Chris Seveney · Answer

@Matt Frazier

It’s possible but yes the lender will pay taxes on interest based on the applicable federal rate (AFR).

Can google irs applicable federal rate for more info

Anyone familiar with 0% seller financing?

Anyone familiar with 0% seller financing?

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