Is there a tax deferral option after a Seller Financing pay-off ?

7 Replies

A seller named Al provided 80% financing on a commercial property he sold in 2008. The owner (Josh) is now selling the property and Al's loan will be paid off. Can anyone advise if there is a way to further defer the capital gains taxes for Al by transferring the pay off amount to another investment? Thanks for your insights and suggestions.

Nope, that I can think of, too late for a 1031.

Unfortunately, there is not.  The installment sale was a unique identifiable tax item.  Once Al receives the payoff at closing, the installment sale is complete and the balance of the capital gain is recognized.

I have a client in this same dilema (had this phone call just this morning.

I would think if it is recorded against the property, it would need to be paid off at closing in order to deliver clear title to the new buyer. I would assume this would create a tax consequence for "Al". Is there a way to assign the mortgage to a different property?

If it is NOT recorded against the property (which sounds crazy but you would be surprised how often there is a note but no mortgage), then I do not know if there is an issue.

The cliens attorneys and accounts are trying to figure out a way around it, if they do, I will follow up here with a post.

Did Al do an exchange when he sold the property to Josh? If so, he could have defferred the capital gains on the note at that time.

Thank you Wayne, Roger and Ryan for your replies.

In response to your questions Ryan, the note is secured by a Deed of Trust on the property. The note would have to be paid off at closing to clear the title. Al offered to extend the note to the new buyers which, according to Al's attorney, would have allowed the tax deferral to be extended. Unfortunately they did not accept the offer. That raised the question of alternate investments that would allow a continuation of the tax deferment. If you hear of anything that would be useful, please give a shout out. Thanks again

Perhaps there is a way to walk the mortgage (substitute different collateral) so that the gain is not realized.

Worst case is that the Federal portion will be treated as long term captital gain. Best case would be if the amount subject to the carry back continued as a debt, but secured by different real estate used as collateral. Is that still a taxable event? That's why you pay CPA's.

This could work only if Josh had a free and clear property with a large enough value to meet Al's LTV requirements and both Al and Josh agree to a substitution of collateral on Al's note. If so, then Josh gets to keep all the proceeds of the sale because his mortgage was transferred to another property. Al continues to collect his installment payments from Al until such time as the loan is paid off.

Note that Al is only deferring the tax on the portion of the sale proceeds that is unrealized profit.  Al is also deferring receipt of the tax free portion of the sale proceeds that is a return of basis.

Here's a thought, which may or may not be possible.  Could Al allow his mortgage to be portable ... i.e. go with the property and be assumed by the buyer?

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