Seller financing/capital gains question

3 Replies

Hello! 

 I'm looking at purchasing a $1.2m property. This property is 8.9 acres, has 2 warehouses and a fairly large paved parking lot. 

I plan to use 1 of the warehouses for my automotive business. 

I don't have enough for a traditional down payment. However, the owner is open to creative financing options, expressing that he'd like to avoid as much capital gains tax as possible. His first financing offer was $200k down, 20 year term, 7.9% with a 10 year pre-payment penalty (unsure of penalty specifics yet) . I don't have the $200k though. 

We have a fantastic relationship with the local bank. Several million loaned to us over the last 20+ years for other businesses. My proposal to them might look like this: $800k bank mortgage, 25 year term, 5.5% - $400k seller financed, 20 year term, 7.9%.

The interesting part of this deal is that a large company just signed a lease with the owner to rent 1 warehouse and a large portion of the parking lot for $7500/month, 2 year term laid in full up front. There is also another small conakny renting a portion of warehouse 2 for $2500/month, and just signed a 1 year lease. 

If the bank doesn't immediately reject this offer, what does the capital gains hit look like for the seller? I'm 95% sure he inherited the property many years ago. 

Are there any other scenarios that I might be able to aquire this property with little money down? Thanks! 

@Spencer Mills sounds like a great deal.  I would go talk to an accountant who has experience in real estate with him.  If he does some owner financings he will spread the gains out over the course of the installment contract which is a big advantage.  It would be nice to have an accountant explain that to him so it is not coming from you.

The seller will pay capital gains on the difference between his cost basis [purchase price + expenses - 25% of depreciation recapture tax] and the amount received from the bank and income from the interest on the seller financing.  From what you've described, the property is likely free and clear.  Thus the $8000k+ will put the seller in the highest tax bracket. 

Why don't you get 80% seller financing and find a bank / personal lender that will be in second position for the 200k?  That will lower the seller's tax hit.