2 Parcels (3 units) Owner Financing Questions

5 Replies

I am looking to purchase a package of properties in Ohio. The owner is interested in owner financing but has questions about the tax implications for him and how the gains would be handled.

Details: 

  • 2 parcels
    • 1 single family home (worth approx. 80k) has 60k in equity
    • 1 duplex (worth about 100k) owns free and clear
  • Wants to sell both as a package

Lets say I offer to buy for 170k with following terms:

  • 20 Years at 5%
  • 5k down

What will he pay on capital gains each year? What other details pertain to his tax liability?

Thanks!!

His capital gain cannot be determined without first knowing his tax basis in each of the properties.

@Thomas Castelli thanks for the response. So he'd have to establish his tax basis then adjust depending on improvements, etc.?

Single family purchased for 55k, duplex purchased for 53k. For the sake of creating a full situation lets say he's done 10k in improvement for each. So his basis for each:

  • Single Family: 65k
  • Duplex: 63k

@Brandon Sok , In my experience with Seller finance it's best to compare to if they sold it traditionally.  In this scenario where you buy for 170 and his bases is 128, he would pay capital gains on 42K plus any depreciation that he has claimed over the years.  He would pay this gain in one year.  In owner financing, the seller is able to spread this gain over 20 years in your scenario, which is a much lighter tax burden.

Hope that helps, Good luck!

@Brandon Sok

I have done a few land contract deals (owner financing). As mentioned before, you are only liable for taxes on the difference between the cost basis and current value. So if you bought it for 100k put 20k into it, and sold it for 150k, only that 30k is a taxable capital gain, plus any depreciation that was claimed will be recaptured with the sale. They will determine the % of difference and that is the taxable amount based on the proceeds of the sale.

Furthermore, any interest you pay to the seller is a tax deduction for you, just like any mortgage interest from the bank. Also, the interest gained annually from the "mortgage" is taxed like any other capital gain for the seller.

However, if you have no balloon payment, and you have a 20 year amortization schedule, it will spread out the capital gains to potentially reduce the tax burden, depending on the sellers financial situation. Also he will make extra income from the interest each year, so that may be a selling point for you to give them. 

I am not a CPA, but I have bought and sold on land contracts in Ohio. If the situation works out for both parties, it can be a great tool to utilize. 

@Joseph Cornwell & @Tyler Wehrung Thank you for taking the time to respond. Both posts are very helpful. I have a much better understanding now.

Are either of you aware of the the implications of the new tax laws? Do anything change?

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