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Creative Real Estate Financing

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Jesse Crawford
  • Rental Property Investor
  • Tulsa, OK
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Sub2 - Seller Proceeds - Taxed as Cap Gains?

Jesse Crawford
  • Rental Property Investor
  • Tulsa, OK
Posted Mar 16 2023, 06:28

Morning BP Fam! I am working through my first subject two deal and one objection that I've not seen covered is how the proceeds to the seller / homeowner are taxed. My assumption is that since the deed of a property is changing hands that Uncle Sam would still view this as proceeds from the sell of a property. I'm hoping to have a CPA with experience with sub2 might weigh in.

Thanks in advance and best of luck!

Jesse

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David Ramirez
  • Investor
  • Tampa, FL
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David Ramirez
  • Investor
  • Tampa, FL
Replied Mar 16 2023, 06:35

If the proceeds from the sale of the property are equal to or less than the original purchase price of the property (including the down payment), and there is no gain in the value of the property, then the seller generally would not have to pay taxes on the sale.

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Chris Davidson
  • Real Estate Agent
  • Boise, ID
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Chris Davidson
  • Real Estate Agent
  • Boise, ID
Replied Mar 16 2023, 06:43

@Jesse Crawford if its been a primary for 2 years in the past five uncle sam wants you to keep a bulk of your capital gains. 

Cheers!

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Randy Rodenhouse
  • Investor
  • Charleston, SC
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Randy Rodenhouse
  • Investor
  • Charleston, SC
Replied Mar 16 2023, 06:49

If this is the owner occupied property then they have the exclusion of $250,000 you're single or $500,000 if married if lived in the property to the last five years. It's a house is an investment property then they will pay capital gains tax rate on any profits if they have held the property for over one year. However if there are no profits and you are just taking the loan subject to the existing debt then there is no tax. 

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Jesse Crawford
  • Rental Property Investor
  • Tulsa, OK
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Jesse Crawford
  • Rental Property Investor
  • Tulsa, OK
Replied Mar 16 2023, 07:07

Thanks @Randy Rodenhouse, @Chris Davidson, @David Ramirez

This aligns with my assumptions that sub2 deals are still a transfer of title/deed and the associated tax implications are no different than a traditional RE transaction.

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Chris Davidson
  • Real Estate Agent
  • Boise, ID
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Chris Davidson
  • Real Estate Agent
  • Boise, ID
Replied Mar 16 2023, 07:15

@Jesse Crawford work on separating the financing from ownership/ control. sub2 and OWC are sales with non conventional lending everything else with the sale is the same. Rent to own, rental arbitrage, or lease options are not sales but ways to control property.

Best of luck!

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Eliott Elias#2 Starting Out Contributor
  • Investor
  • Austin, TX
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Eliott Elias#2 Starting Out Contributor
  • Investor
  • Austin, TX
Replied Mar 16 2023, 07:41

It depends on if it was homesteaded. If it was not, they seller pays capital gains on all proceeds. 

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Chris Picciurro
  • Accountant
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Chris Picciurro
  • Accountant
Replied Mar 16 2023, 07:46

Very good question and understanding cash flow vs. tax flow issue. The tax situation is based on the property sold. If it is a primary residence, the Section 121 exclusion can apply. The transaction is considered a sale. That said, typically the taxable portion is not very significant if it's not a primary residence.

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Jesse Crawford
  • Rental Property Investor
  • Tulsa, OK
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Jesse Crawford
  • Rental Property Investor
  • Tulsa, OK
Replied Mar 16 2023, 07:54

To add to the benefit of the post these are the details. 

This is an owner occupied single family home:

I have $100k OPM available @ 6% w/ interest only payments on a 10yr balloon. I am considering putting the full 100k into the property which put the sell price at ~$320k which is likely 20k over market.

As-is the property should cash flow $250/mo. Open to any further thoughts on the deal!