Capital Gains and Seller Financing - Advice Needed

5 Replies

Hey BP -

I’m looking for some capital gains tax advice as I try to convince a seller to owner finance a multi unit property.

From a tax benefit standpoint for the seller, is it more beneficial for him to sell at a lower purchase price and get higher interest rates OR sell at a higher purchase price, and lower interest rate. I can certainly crunch the numbers but I’m asking the question specifically from a capital gains tax standpoint. I would think lower purchase price and higher interest rate would be more beneficial for him. Is this thinking correct?

Thanks in advance. Tom

Higher PP and lower interest.  Cap gains are favorably taxed (15% for the most part) whereas interest is considered ordinary income at best.  

I receive only about $11k in interest per year.  When I plug that in to my tax software every year, I watch my tax burden rise over $6k!

Careful giving sellers tax advice though, @Tom Horan .  I like to preface anything with "I'm not a tax guy, but if it were me..."  or something to that effect.   

Share the numbers!

@Steve Vaughan - Appreciate the insight. That makes sense - I'm assuming this all depends on the owners tax bracket as well. I am far from a tax expert, I just want to have a general understanding of the tax benefits from owner-financing. Still working on the numbers a bit - and need the owner to feel comfortable with this concept.

2 properties next door to each other zoned for mixed use residential/commercial. Also another building out back with an apartment and shop space making 5 units for revenue (I feel there is value add potential as well for another unit or two)

These are the numbers I'm shooting for in an ideal world:

Purchase Price: $550,000

Down Payment: $50,000

Interest at 6% for 5 years with a balloon amortized over 30 years.

I need to see the books to be sure of these numbers - but I'm being told $6,000 in monthly rent. The numbers look good with those figures, but we'll see what happens! Thanks again Steve.

Curious what your insurance and property taxes would be like P&I w/ your numbers at what almost 3k itself.  Also w/ your low down, would you be able to qualify for a refi w/ out having that much equity?

@Matt K. - Insurance I have around $200/month and Taxes another $200/month. 

Good question with the refi. I've thought about this as well. My goal is add another unit to add value which should help the refi, but will likely factor in a 2-4 extension in the terms. Other recommendations on how to better position myself for a refi?

Originally posted by @Tom Horan :

@Matt K. - Insurance I have around $200/month and Taxes another $200/month. 

Good question with the refi. I've thought about this as well. My goal is add another unit to add value which should help the refi, but will likely factor in a 2-4 extension in the terms. Other recommendations on how to better position myself for a refi?

 I think this falls under commercial, I have no idea on that. I can say though counting on appreciation and a appraisal is super risky imo. Also, commercial appraises differently if I'm not mistaken.

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