Seller Worried about Capital Gains?

[Chad Gilchrist]

Hey BP hive mind! My wife and I are supposed to close on a multi unit (zoned as a 2 unit with a legal 3rd & bonus unit/in law) in Chicago tomorrow. Yesterday the seller (an older man who has owner occupied the property for 21 years) called us and told us he might have to back out of the deal because he’s worried about taxes. We know that we can get into the legality of backing out at the closing table, but before that, we’d really like to ease his mind (the advice he’s getting we don’t think is from a qualified professional) and to make sure that my understanding of the sales tax is correct so:

-He bought in 2001 for 185k

-Refinanced in ‘06

-Took a HELOC out a few years ago for rehabs, but stopped paying it (as well as his mortgage) when he fell on some hard times and had some major medical bills. Principal is 70K, interest is 30K for a total of ~100K

-He owes $265K on the refinanced mortgage

-Agreed sales price: $440k

So that would make him in it for 365k. The advice he received is that he will owe taxes on the difference between the sales price (440) and the original purchase price (185), which would subject him to capital gains. My understanding is that you’re taxed on the profit (so 440k-365k = 75k).

Additionally, my understanding is that because he bought it as a primary residence and has lived in it 2 of the last 5 years and is single, that he wouldn’t be subject to any cap gains for the first $250K in Profit, which again, takes into account how much he still owes on the property. 
Beyond that, my understanding is that he can tack the 100K in HELOC costs—or at least the principal—to the original purchase price as capital improvements because he used that HELOC to improve the property. which would make him not liable for capital gains either.

Is this correct? Any advice/help would be so greatly appreciated, as my wife and I are very nervous about this closing tomorrow, and would love to have our minds eased and for understanding!

Thank you!