Tax implications for seller finance (inherited property)?

Question

Hi everyone,

My husband and I found a property that we want to make an offer on. The original owner passed away unexpectedly ~1 year ago and their children inherited the property. There’s no mortgage and it has been on the market for a while, so we think this might be a good opportunity to offer seller financing (our first foray into it). However,we’re wondering if that makes sense from the seller’s perspective. The property hasn’t significantly appreciated over the last year so they won’t owe much, if any, in capital gains tax. Would they have to pay taxes on the income from seller financing? Or just the interest? I’m hoping this can be a win-win for both us and the seller. Thanks in advance!

Joseph Palmiero · Answer

Assuming no gain on the sale, they would pay tax on the interest portion only.

David M. · Answer

@Sarah Albert

Sure, assuming you can convince the heirs that you are a good credit risk. Also, you need to be able to work with them on the Note/Mortgage/DoT in the future. Honestly, having the children (and potentially their spouses) as your creditors could get messy --- checkout the family dynamics.

Of course, consult a qualified professional, but with the death the property should have a step up in basis so they should have little capital gain tax liability.

It could be a good deal for your, but lets face it potentially a bad deal for them. Lets face it in this market, they should be able to cash out easily and quickly.

Good luck.

Chris Seveney · Answer

This is the perfect scenario to discuss with them about seller financing. As others mention they will pay tax (ordinary income rates) on the interest payments only and once they exceed their cost basis they will also pay tax on whatever is above the basis.

If you go this route, recommend to them to speak with their CPA so they understand what they are getting into.

Paul Evans Jr · Answer

That’s great to hear, thanks for the reply!

Tax implications for seller finance (inherited property)?

Tax implications for seller finance (inherited property)?

Most Popular Reply

4 Replies