Are there Rules against this? hi

[Harrison Engle]

Hey, everyone. I'm really interested in Real Estate Investing/Finance and I like creative investing but I don't have any practical experience. I'm only 25 and property is really expensive here in the Bay area. I might have the opportunity to go partners with someone to buy a property with seller financing where the owner carries the note in full. 

From what I've read the interest rates are generally higher when doing this(aprox 7%?). This got me thinking but correct me if I'm wrong, if interest paid for investment properties is tax deductible then what stops the parties for agreeing to a lower sale price and higher interest rate wherein the seller might gain more cash from the sale over-all and the buyer reaps more of a tax deduction? 

I haven't done the math on this theory, but If this in fact possible to make higher deductions, are there rules against this or reasons why one party of the other wouldn't want to do this? 

p.s. didn't finish the title before posting and can't edit but do take it as a "Hi" I guess haha.

[Chris Mason]

Hi @Harrison Engle,

The biggest thing you will come up against is that most sellers have a mortgage that they need to pay off, to sell the property and convey clean title to you.

There's a transaction structure called "subject to [the existing mortgage]" that attempts to get around this. People do it. It is far from clear that the sellers in these transactions aren't breaking a bunch of rules, I suspect most lawyers would advise against it.

My understanding is that, yes, you get to write off the higher interest rate and save more come tax time. I'd check with your tax guy on any limitations that might apply to your particular situation. But you never save as much as the total value of any write-off, because your top marginal income tax rate was never 100% to begin with.

In spite of all that, I have seen folks successfully buy real estate using seller financing and it work out well for everyone. It crosses my desk as a refinance down the line, when the property has appreciated and there is enough equity, when the borrower has fixed up their credit, been more honest on tax returns, etc.