Investor · FL · Member since 2019 · 25 posts · 7 votes
I have a really good deal in a hot area in San Diego.The seller is motivated, the home she inherited and it is currently vacant as she lives in another city and the last tenants moved out. I have built the rapport with her and I can tell she doesn't have the time to worry about it but wants to sell. The issue is this, she doesn't want to do a 1031 exchange and roll it into another property (she isn't in to being an investor) and she doesn't want to get hit with significant taxes with the sell of the home. How can I solve this issue and create a win-win for both of us?
Ask her if she is willing to do a seller carry on the property. She gets mailbox money and spreads the taxes out over the life of the loan, you don't have to conform to traditional lending requirements.
Hardest part about this is setting it up so you look like you know what you are doing and it doesn't come off as shady. I'd dive deep into how to execute the mechanics of a seller carry note, find an attorney to draft the documents, a servicer to handle the regulatory requirements if she wants, ect.
Ask her if she is willing to do a seller carry on the property. She gets mailbox money and spreads the taxes out over the life of the loan, you don't have to conform to traditional lending requirements.
Hardest part about this is setting it up so you look like you know what you are doing and it doesn't come off as shady. I'd dive deep into how to execute the mechanics of a seller carry note, find an attorney to draft the documents, a servicer to handle the regulatory requirements if she wants, ect.
If she wants to defer taxes without actively managing the property she may consider a DST (Delaware Statutory Trust) or NNN Private Placements as an alternative. If she inherited the property recently (step-up in basis), it is possible she may not owe very much in capital gains? Seller carry is an option as well as @Bill F. mentioned.
If she inherited it she got a stepped of basis at date of death- she could potentially owe close to no taxes on the house sale depending on when it was inherited.
@Kenesha Lewis - The seller could do an intermediary installment sale and couple it with an unsecured loan. I've helped some of my clients arrange this type of transaction. It gives the seller 30 years of tax deferral (including depreciation recapture!) and puts cash in her pocket that can be reinvested however she wants and on her schedule. Its perfect for when the seller doesn't want to sell because they don't want to stay in real estate.
Kanesha- has she lived in the home 2 of the last 5 years? If so, check out the 121 exclusion. If not then look at the deferred sales trust if a strategy worth exploring if the seller’s equity is more than $500K and the tax liability is $100K or more.
Why not just use the traditional installment sale?
There are a few significant shortcomings to a traditional Section 453 sale:
· Security is neither diversified and usually not investment grade. Most often, the asset being
sold is not investment grade nor is it diversified. Therefore, even if the seller has the ability to
foreclose in the event of a default by the buyer, the asset might not be worth as much as it was
at the time of the original sale, and the buyer may have even contributed to its decline in value.
-The Deferred Sales Trust funds can invested into a diversified liquid portfolio of investment grade securities, Investment Real Estate, Hard Money Lending and to fund a new business or real estate devolvement. All tax deferred. This is how we eliminate the need for a 1031 or traditional installment sale.
· Prepayment risk – Generally, the buyer in a conventional installment sale has the right to prepay
the obligation on the note. This would result in the seller’s capital gains taxes being triggered.
The deferred sales trust can be structured as a 10 year note with a balloon payment due at the end, however, you can renew this note for 10 years at a time and do this for as long as you want. 30,60, 90 years. Most likely if it goes this long then the note will pass to your heirs as a part of your living trust and heirs can step into your shoes. Note: the 1031 exchange maintains the stepped up basis and the deferred sales trust does not. This is an advantage for the 1031. The DST does give a new depreciation schedule while the 1031 does not. You would have to run an ROI here.
Again a conventional installment sale is generally understood to achieve tax deferral for a relatively brief period of time (the transitional period during which the seller financing is needed by the buyer and most of the time I’ve seen 2- 5 years). The Deferred Sales Trust can also be structured for a longer period of time than a conventional installment note is traditionally structured for thus given you the advantage of ongoing time value of money tax deferral and wealth building opportunity. The effect of this is that capital gains taxes can be deferred over a longer period of time and, prior to the vesting of the balloon payment (when that payment becomes due to the taxpayer), the taxpayer can potentially negotiate a new installment obligation with the trustee (think of it as a refinance) and continue the tax deferral effect.
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