Installment sale to minimize taxes?Master lease?Option contract?

Installment sale to minimize taxes?Master lease?Option contract?

Oakland, CA · Member since 2012 · 26 posts · 12 votes
I have a wealthy client that would consider selling me a building in the East Bay Area. Currently it’s in a trust that will go to a family member for a life estate. Once that family member passes it will go to charity. Another property will go to a friend (same situation). This person is open to taking this one I want out of the trust and selling to me potentially as an installment sale if it helps her avoid paying taxes. I’m looking for a win-win scenario for both parties. Could the installments go to her until death and then go to a family member after that without a taxable event? (Or at least much lower taxes?) One person gave me a different idea of doing a master lease on the property along with a lease option contract to purchase for a set price upon death. For example, I could offer to pay the same amount she is currently collecting in rent (or more depending on what we negotiate). I can control the property and do improvements knowing I am protected by my lease option contract. I would prefer that any payments I make would go to paying down principal. Thoughts? Thanks in advance!
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  • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    With an installment sale, a portion of each payment will be interest, principal (cost basis) payback and profit.   The bummer is, all depreciation must be recaptured in the year of sale. May not be a big deal if all taken pre 1997.

    How old is this person?  We'd all be better off tax-wise leaving to our heirs of course.

    A renewable lease option is a cool idea i have tried.   No such thing as principal payments though as you are just leasing.  Then it would be a disguised sale and get messy. And yes, payments will continue to the heirs of the estate, LO or SF.

    And don't do an LO with a property that needs a bunch of work.  You won't own it. Good luck.

  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    7y
    Originally posted by @Daniel S.:
    I have a wealthy client that would consider selling me a building in the East Bay Area. Currently it’s in a trust that will go to a family member for a life estate. Once that family member passes it will go to charity. Another property will go to a friend (same situation). This person is open to taking this one I want out of the trust and selling to me potentially as an installment sale if it helps her avoid paying taxes. I’m looking for a win-win scenario for both parties. Could the installments go to her until death and then go to a family member after that without a taxable event? (Or at least much lower taxes?)

    One person gave me a different idea of doing a master lease on the property along with a lease option contract to purchase for a set price upon death. For example, I could offer to pay the same amount she is currently collecting in rent (or more depending on what we negotiate). I can control the property and do improvements knowing I am protected by my lease option contract. I would prefer that any payments I make would go to paying down principal. Thoughts? Thanks in advance!

     Installment sale will make the value of the receivable be included in the gross estate. 

    There are two other vehicle: private annuity and SCIN. Look more into those.  

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  • Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    7y

    I would have your attorneys look into the installment sale. Might work for smaller deals but for larger deals I’ve have had top attorneys tell me they were fully taxable and had no benefit depending on how you structure it. 

    The best option would be a 99 year ground lease IMO. Would be fully financeable as well and has a ton of tax advantages. You can build in certain terms that are highly advantageous to you. 

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