Elderly owner, creative financing solutions!

[Graham Atwater]

Hi all! 

I’ve found a potential deal with an open minded owner. I’m trying to structure a deal that genuinely benefits the seller and I. The seller is also very elderly and may pass soon (he’s rather accepting of this fact). He currently has the property set up in a transfer on death deed. 

Sellers Info

-Main interest: minimizing capital gains/taxes, preserving estate for his kids

-SFH free and clear, no mortgage, purchased 30 years ago for ~$150k

-Currently acting as landlord, very likely doesn’t want to continue in this capacity 

My info:

-I want to cash flow the property now 

-I want to purchase the home now or in the future 

Property info

-No tenant, rent comps $2600-2800

-Current comps of $290k-320k

I don’t know the sellers full financial picture. I do know minimizing capital gains or any other taxes is a priority for him. 
 
I know his cost basis in the property is likely very very low, so selling would trigger significant capital gains and depreciation recapture. 

Here’s what I’m thinking….

-Master lease option now, with option upon TODD actuation or some period afterwards. This allows cost basis to be raised before selling, maximizing tax benefits to the seller/his estate. It also allows me to take over property management, landlords duties, and reap the cash flow now. 

What are your thoughts? Anything I’m missing? How could this be done?

I love BP!!!

[Chase Shaffer]

If He wants to minimize capital gains abd preserve it for his kids. You could always see if he will just seller finance for 30 year term because a promissory note is considered an asset and can be passed down just as a house would be able to.

[Graham Atwater]

That’s what I was thinking too…and the capital gains would be deferred (and proportioned with each installment payment from what I understand based on the profit ratio). 

But what about depreciation recapture? From what I see 25% of the depreciation would be due in the tax year of the sale. 

Does this seem accurate?

[Graham Atwater]

Also, FWIW, I’m already consulting with an attorney and a CPA who’re RE focused. This is simply an informal discussion on the potential tax/legal dynamics of this situation!

[Graham Atwater]

For posterity:

A local attorney (who is also a CPA and focuses on RE/Estates) did inform me that it would absolutely be possible and binding to create a lease option that would then just transfer to beneficiaries upon passing of the owner.

I figure this would probably be the answer but wanted to make sure. And while it is not my sole concern that the new "owner" avoid depreciation recapture, I wold like to structure any agreement that does benefit the current owner and his family as best as possible.