Structuring a deal from family as a owner financing

[Jacob Scholes]

I'm looking into purchasing a duplex from my parents. I had been looking into buying it from them next year on VA loan, and they would do a 1031 exchange to buy a new property..

since we have an uncertain future with interest rates and the election i'd like to purchase sooner.

My parents mentioned we could look into owner financing by doing a cash out refinance and putting my name on the loan and paying them our downpayment separately. We would refinance in the future to get the loan in our name alone.

This would give them more time than allowed if they had to do a 1031 exchange because it has been hard to find deals in utah right now.

Would they have to pay any taxes on the equity they finance out of the deal?

Has anyone else done something similar or can offer any advice?

[Bill Exeter]

Hi @Jacob Scholes, 

The sale of the property from your parents to you would be considered a related party transaction.  You would need to hold the property for at least two (2) years in order to allow them to successfully structure a 1031 Exchange transaction.  

You could certainly buy the property from your parents and structure seller financing (seller carry back note).  They would recognize and pay tax on any cash received by them this year.  The rest of the taxable gain would be deferred over the term of the seller carry back note.  There are many ways to structure this so make sure they meet with their tax advisor first.  

This is a pretty common structure for those that do not want to reinvest in other real estate through a 1031 Exchange and do not want to get hit with taxes all in the same year.  It is important for your parents to understand that the sale of the property to you triggers their taxable gain.  The taxable gain is merely being deferred over the term of the seller carry back note.  If they want to indefinitely defer their taxable gain they should look at a 1031 Exchange.