Seller Financing, Objections & Taxes

8 Replies

Hi Everyone, let's talk seller financing. I am becoming increasingly interested in asking for seller financing as a way of purchasing residential real estate for flips and rentals. I am curious of those that use this type of financing, what are common objections you receive from sellers when discussing seller financing and what are you responses/ways of moving past them.

Additionally, here are some questions I haven't been able to find answers to:

What happens to the mortgage if the seller passes away during the repayment period? Does it go through probate and pass to their heirs? Is it taxed as part of their estate? Would you just continue to make payments to whoever takes over the mortgage?

Trying these questions again and hoping to get some good responses. Thanks!

@Matt Fish  

  seller fin is a great option but the hardest part is selling the deal.  Getting you sales pitch in line is the most important.  If you explain the benefit to the seller ie : amor chart and they can see what exactly they will make over time and not just taking a hit on capital gains taxes pretty easy sell depending on the sellers situation.

Typically on your questions if the die.  It should be structured in the note. But it if falls to the heirs and you are not in default per terms of the note there is not much they can do.  The property is deed to you or you entity not the lender who has passed.  The heirs could continue taking payments or sell the note.  Hope that helps.

@Joshua Houchins   Thanks for the reply. The answers regarding the seller passing do help. I figured that we be the case, just couldn't find anything that would confirm it.

You bring up another question - does the seller not pay the capital gains on the sale price when providing seller financing? I would think that they would pay taxes on the sales price for the year its sold and then pay tax on the interest made on the financing. Is that not correct? Thanks again.  

Originally posted by @Matt Fish :

@Joshua Houchins   Thanks for the reply. The answers regarding the seller passing do help. I figured that we be the case, just couldn't find anything that would confirm it.

You bring up another question - does the seller not pay the capital gains on the sale price when providing seller financing? I would think that they would pay taxes on the sales price for the year its sold and then pay tax on the interest made on the financing. Is that not correct? Thanks again.  

 It is paid in installments on Form 6252 Installment Sale. It is used to recognize the gain and what is allocated to basis.  That means they recognize gain in proportion to the principal paid.

Look at it this way if I sell you a building for 400k that I have a 100k basis in And you put 100k down in 2014 and your first payment is in 2015. I would recognize 75k in gain.

On an installment sale, the seller categorizes each payment received into interest, original investment recouped and capital gain and pays tax accordingly based on funds received each year.  There would also be recaptured depreciation due the year of the sale even though the proceeds may be received over several years.

@Matt Fish  

No you can not pay taxes on money you have not made yet? What if you default and then they actually sell it? They would pay capital gains tax twice. You only pay tax on revenue you have received not accounts receivable . The Hey are still paying it but over time not at once. 

Furthermore this is the angle you take to sell the deal. As I have explained in other forums most owner fin deals you can land are current landlords they have a portfolio that has already paid for itself years prior to you coming into the picture.  They know there is not a mass of people who are lining up with cash or able to get fin to by there properties.  Approaching these sellers is  great they understand the business and you don't have to re explain the wheel.  There life style is already set up to receiving monthly payments. So instead of dealing with tenants they just collect an interest and principle payment from you every month, avoid a tax hit while still generating cash flow on the investment with little time involved.  These sort of people are your target market. 

The seller that finances it would not pay gain twice.  They could only pay capital gains on any amount over their cost basis.  Interest received is taxed also.  If they foreclosed on the property and resold it, they may end up making more and pay more capital gains or they may make less.  That would be determined after deducting expenses.

The advantage of seller financed installment sale is that the tax on the capital gains can be spread out of the life of the installment sale.  It could also keep you from going into a higher tax bracket if you made a big profit on a sale by spreading it over multiple years.

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