Analyze my potential deal - seller financing and tax issues

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

7y

All,

I am hoping to get some feedback here w/ potential seller financing (I am the seller). I am a lawyer by trade and am generally not too good w/ understanding tax numbers, etc. I will try to keep it simple - any feedback or thoughts are much appreciated.

- Original purchase price $170k w/ 1031 money

- Assume I have lived in property last 2 of 5 years now

- Assume no depreciation taken (i am not certain of this i would have to check past tax returns but assume this for now)

- Current market value: $170k (unfortunately this property has not seen any gain)

- Buyer proposes the following terms:

- Purchase price: $170k (market)

- Interest Rate: TBD (any thoughts?)

- Monthly P&I: TBD (not sure on this either)

- 5 year “balloon” buyer to refi to traditional mortgage

My (seller) motives for selling: no longer want to own, want to free up cash and avoid traditional closing costs.

My questions center around (if this makes sense)

- Do i face any tax on the down payment in the assumed scenario above?

- Do i face tax on the monthly interest?

- Do i face tax on the principal payment?

- Do i do an “installment” plan versus something else?

- Have i successfully avoided any potential 1031 issues?

- Is there ideas to structure the deal to avoid as much tax as possible on any portions of this scenario?

I really appreciate all of you and welcome any feedback. BTW - also seeking lawyer referrals familiar with drafting these types of purchase agreements/contracts. Property is located in Chicago, IL.

Maria.

Has this been your rental property? It’s not clear from the post.

With the selling expenses, you don’t have any gain, so there is not tax. If this was primary residence, you don’t have gain up to 250k for single any way.

However, you might be able to take loss if this was your rental property. You can’t take loss in primary residence.

If you seller finance this, only tax implications will be on your interest income. The interest you are going to make on the transaction each year

There is no tax on downpayment if there is no gain. We need to know the adjusted basis of the house to figure out the gain, if there is any. If it was rental, the depreciation will bring down the basis( doesn’t matter if you took or not), IRS assumes you took it.

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Carl FischerPro Member

Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes

7y

@Maria Bocanegra

You most likely won’t have to pay any capital gain tax. Hire @Ashish Acharya to help so you understand the ramifications.

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Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

7y

@Maria Bocanegra @Dave Foster can chime in. But, if you acquired this property through a 1031 then it Had to be a rental,property when you acquired (or you did an improper 1031).

So,

If I understand the mechanics of a 1031 correctly, your basis in the property (due to the carry forward basis in the 1031) is Lower than $170k.

You are Liable for depreciation recapture while it was a rental, whether or not you declared the depreciation.

Assuming the above is true, you will have taxes due.

You definitely pay income tax on any interest received.

For the Principal you receive (including the down payment) it will be allocated into three pro data portions of:

Return of basis/costs-no tax

Cap Gain- cap gain tax

Depreciation Recapture- ordinary income tax at up to 25%

@Ashish Acharya When later converting an investment property, acquired by a 1031, into a primary residence, then selling, give you a partial, Qualified Use pro rata calculation for the 121 exclusion like when you do the same thing with a non 1031 acquired property?

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

7y

@Maria Bocanegra,

, there's no issue necessarily with the 1031s in the past. Just make sure you calculate all past gain as well. Because when you sell in an installment sale you will recapture all past and present depreciation. And you will pay tax on all present and deferred gain. The installment sale only delays the payment of some of those taxes.

You may qualify for a partial exemption with the primary residence exclusion. But this is where the past 1031s will come to roost. When you convert a property from investment to your primary residence and it has been a part of a 031 exchange there are some additional requirements.

1. You must have owned the property for at least 5 years.

2. You must have lived inthe property for 2 out of the 5 years prior to sale.

3. You will only get to prorate the gain between periods of qualified use (as your primary residence) and non-qualified use (as investment).

4. You will still have to recapture all depreciation.

So the primary residence exclusion is not going to give you a free ride. Check the taxability with your accountant.

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Analyze my potential deal - seller financing and tax issues

Analyze my potential deal - seller financing and tax issues

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