All Forum Posts by: Bob Norton

@Brendon Kerrigan The legal issues for a trust selling a property is the same as an individual selling a property.  The trustee will have to sign on behalf of the trust.  I'm assuming that the seller you mentioned is also the trustee of the trust.  

You will need to sign a promissory note and a mortgage to the trust, just as you would an individual.

Make sure the sale is closed properly with a real estate attorney or title company.

@Charlene Turczyn Have you considered converting it into a 4 plex?  Would you be able to increase rents by having four units?  What would the value of the building be after converting it to a duplex or fourplex?

I think investing $75k to get $2.4k per month in cash flow is a good investment, especially if you have the cash in the bank earning pennies.

@Brendon Kerrigan With a seller financing deal (also known as an installment sale), the seller will receive part of the sale price each year, plus interest.  The seller will pay income tax on any interest received during the year and capital gains tax on the portion of the gain they received each year.  

For example, let's say you purchased a property with seller financing for $100k and $10k down and you will pay off the loan over 10 years.  The seller originally purchased the property for $50k, so the seller has a $50k gain, or 50% of the purchase price.  The seller will pay capital gains tax on $5k, 50% of the down payment, in the year you purchase the property and will spread out the remaining $45k of the gain on the sale over the 10 years that you make payments.  In each subsequent year, the seller will pay capital gains tax on 50% of the principal he received from you, plus income tax on any interest you pay him.

So, in your case, the seller will pay tax on the gain included in the down payment you make in 2020, which will be due in April 2021.  And, will pay the balance of the capital gains tax owed in April 2022, when you pay off the loan in 2021. 

Installment sales for trusts are calculated the same way.

@Kurt Linwood You should discuss your situation with a CPA to determine what your actual taxable gain on your sale will be.  Then, you could discuss some options with him or her.  One option you could consider, as @Chris K. mentioned, is investing in a Qualified Opportunity Zone Fund (QOZ).  This would allow you to defer capital gains up to the amount you invested, plus you will get a 10% tax exemption on the capital gains invested in the QOZ when you have to pay tax on them in 2026.

@Dennis Soto Please be aware that you will need to contract with a QI before you close on your sale.  Otherwise, you will not have a 1031 exchange and will pay tax.  There are other timing rules that you need to be aware of and the QI can help with that as well.  @Dave Foster can definitely help you there.

@Wil Cooper Yes, you must report your rent income on your tax return. You are able to deduct expenses related to the portion of your home that is rented. In a duplex, generally you get to deduct 1/2 of the following expenses: mortgage interest, property taxes, insurance, and PMI (if qualified). You can also deduct any expenses directly related to the rented portion, such as minor repairs and utilities. Plus, you get to deduct depreciation for 1/2 of your home.

Check with a CPA for other expenses that you can deduct.

@Paul Sweetman Awesome advice!

@Gaby Marin You could try AirBNB for your rental side, if zoning allows it. I have clients doing this in New Orleans with their duplexes and the STR is paying almost all of their expenses. Of course, that was before COVID when more people were traveling and I would expect it to return to that level after COVID has passed.

I suggest you look into this scenario and run the numbers to see if this strategy could work for you.

@Cheree Harris It sounds like you setup an LLC with a partner. You would file a partnership tax return for the LLC. If the rental income and expenses run through the LLC, then you would typically include it on the LLC tax return. How the LLC members split the net income depends upon the operating agreement between the partners. I recommend that you find a tax advisor that understands real estate to discuss this in more detail to make sure you have the business setup properly.

@Fayyaz Bhinde The income from the LLC will pass through to you and you will end up paying the same amount of tax any way. Save the costs of setting up and moving the property into an LLC for this sale.