Seller only wants a cash buyer, but why?

Question

I've been eyeing a 3 family in the greater NYC area.  It's priced around 400k.  I made an offer and the seller liked it, but said he was holding out for a cash offer for capital gains reasons- he purchased it for under 100k years ago.

My question is what difference would be made in capital gains whether the property was bought with financing or with cash?  It seems the only way he could benefit would be to hide the actual sale price of the house when getting all cash.  Even so, that seems like a bit of a stretch.  Or maybe not.

The house in in great condition and would be a fine candidate for financing.  It would also likely appraise for the selling price.

Any help would be appreciated.

Account Closed · Answer

I'm thinking the seller knows there are issues that will keep a bank from lending on the property. Maybe non-permitted work or some other nonconforming feature. Either that or the seller knows the property will not appraise high enough

Ned Carey · Answer

Whether it is a cash offer or financed will have zero effect on capital gains.

The seller may have the mistaken belief that Cash means a briefcase of $100 dollar bills and that he wouldn't have to report it all. The Price will be on a HUD-1 and the title company will issue a 1099 to Seller and IRS

Actually capital gains is a reason for him to owner finance. Get him to let you pay over time and that will spread out the affect of capital gains tax.  I don't believe that it actually reduces the tax just spreads it out over time and the money is received.

He may also be thinking 1031 exchange but I don't know why cash would matter in that situation.

Matt Devincenzo · Answer

To follow @Ned Carey idea on the 1031 exchange, in that situation the cash offer doesn't change anything cap-gains wise, but may benefit his timeline. With the 1031 there are certain dates that have to be met or the exchange could fall apart.

Joel Owens has mentioned seeing big commercial buyers racing a 1031 deadline, and ending up either settling or buying a deal that didn't fit what they were really looking for. So maybe his motivation is having a more flexible closing that he's sure will happen. The closing could just get extended if he needed more time to find his replacement property and then there's no issue with making the time frame. If a lender was involved and he tried extending too long the sale might fall apart.

Only real way to know is to ask how he thinks it will save him on cap-gains, and see what he says.

Randy E. · Answer

That's what I thought, too.

Matthew Paul · Answer

But the briefcase full of Ben Franklins  would be cool , a couple of guys wearing Fedoras , smoking cigars , counting out  $ 400K in cash .

Joshua Feit · Answer

@Joseph Szladek -- I join the others in thinking that this seller made up a lame excuse. My guess is that the seller wants to close quickly, and he does not want you to tie up the property on a long closing while your bank works through the loan details. If something goes south, the seller has lost all of that time.

Beyond that, underwriters from big banks have been known to throw all kinds of crazy contingencies into the mix, and the seller is probably interested in a simple, quick, and as-is sale.

That's my best guess. I'm rooting for you -- hope you get it (or another one that's even better). Cheers!

Jon Klaus · Answer

I like Austin's thoughts. Also it could be that tax is a smoke screen, and he doesn't want to question your ability to close and believes that a cash buyer is more likely to close.

Michael Noto · Answer

He is either to nice to tell you he doesn't want to accept your offer or is not serious about selling.

The tax excuse sounds bogus to me.

Aaron Montague · Answer

@Joseph Szladek

Also ask him if he's married.  If he lives there, he can sell it, claim the gains with his wife and exercise the 500k exemption allowed by the IRS.

http://www.irs.gov/Businesses/Small-Businesses-&-S...

Otherwise he may just want the speed of a cash transaction.

Joseph S. · Answer

Thanks guys.

@Ned Carey, yeah the only thing I could think of is the suitcase of money.  I have heard a couple of reputable stories with something like that happening here, but in another era.

It's possible he's just trying to get a better offer out of me.

I'll try to press him for his reasoning.

Seller only wants a cash buyer, but why?

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