Seller Financing to Lower Capital Gains

[Bobby Vernazza]

Hello Fellow BP'ers,

A long story short, I have been talking with a new homeowner of a property he just recently purchased (about 1.5 months ago) that has been abandoned for the past 6 years or so.  He is planning on fixing it up and renting the place out.  He works full time and this is a side project that he does after work and on the weekends.  I have been talking with him about purchasing the property before he does too much work on it and raises the price.  One of the main reasons he does not want to sell, is that he does not want to pay short term capital gains tax.  The first thing that came to mind was to do a seller carry back.  I am not too sure how this works, but here is my idea.  He bought the property for 175000 and put about 5000 into it..180000 in total expense.  I am planning to offer him 220000 with a 40000 profit.  However, I am thinking about giving him 180000 as a down payment, alleviating the capital gains up front then, having a 5% interest payment with 5yr amortization.  This would create a yearly payment of 10000 {(0.05*40000)+(40000/5)} and a monthly payment of 833.34.  As a result, the seller would recieve monthly cash flow and after a year, short term capitals will be gone and I can pay off the final balloon payment of 30000 which will be taxed as long term.  All in all I think that this is a fairly good strategy, but I am not sure if this is 100% acceptable.  Any insight you guys have would be much appreciated.  Also I forgot to mention, he purchased the house outright in cash as will I. There will be no banks involved.  I look forward to hearing your responses!