My father owns a duplex outright in Washington State that cash flows him $1200. He wants to maintain that throughout retirement, which begins next year at age 65. I am 43 year old and life expectancy in our family is 85 years old. As he ages, he won't want to self-manage or even deal with the place. Upon his passing, I will be inheriting it. However, he recognizes that selling it may bring in $120k now post-capital gains taxes, which would be nice to start retirement out with but has a limited shelf life if he lives on the principal ($120k/$1200 = 8.3 years of cash flow if he still owned it). He doesn't want to 1031 exchange it for anything else. I'm considering buying it from him now. If we do 150k @ 5% interest (selling financing), the payment would be around $1200 to him for 15 years and no hassle of managing. If he wanted the full balance for whatever reason along the way, we could structure it accordingly. This would help to avoid taxes on his end.
Any thoughts on the potential upsides or downsides that I'm missing? What other considerations would be beneficial? Is there any benefit to buying it now versus inheriting it for free later? Tax issues?
If he's expected to live 20 more years and wants to maintain this current level of cash flow throughout retirement, both options you propose have him depleting this asset before 20 years are up. Does he have other sources of income? That needs to be considered.
There are plenty of options but it's hard to say what might be right for both him and you. Maybe he keeps the rental, hires a property management company, lives on the monthly income in perpetuity and you inherit the rental at a stepped up basis later down the road. This is perhaps the most tax efficient route from a holistic standpoint (considering both you and your father).
Maybe he sells to you and reinvests the capital gains in a Qualified Opportunity Fund for cash flow and a true passive investment. This route would entail more risk in my opinion.
Stretch the owner financing out to 20 years?
He's your father so you both can be really flexible to make sure everyone's goals are met.
Seller financing doesn’t help him “avoid” taxes....it just defers them (cap gains And depreciation recapture) until he receives the month....every year he will owe the appropriate taxes on your payments.