Seller-Financed Note Holder Asking For CASH NOW!

[Matt Inouye]

Hey BP Community.

A few months ago (pre-COVID-19) one of my seller-financed note holders approached me and asked if I could accelerate the payoff of the note even though the note/contract still had many years left before being due.  I am wanting to help the guy out... but due to the number of financed properties in my name, I am unable to straight up refinance the note holder out with a Fannie/Freddie loan.

I recall on several podcasts that some buyers have purchase their seller-financed notes at a discount.  However, instead of buying at a discount and incurring a tax liability on the portion of cancelled debt, has anyone done a "price reduction after purchase" to amend their purchase price after the fact.  

From what I can gather, it is allowed by the IRS (publication 4681), but its not a free lunch.  Instead of getting taxed as ordinary income on the cancelled debt, your cost basis on the property is lowered by the amount of debt "forgiven".  It still seems to make sense to do it this way as capital gains are taxed at 15% (vs. 30%+ for ordinary income) and I wont incur the tax liability until property is sold.

I am most concerned on how to actually perform this action and if there are any hidden pitfalls I should consider prior moving forward.  If anyone has ever done this particular type of transaction, I would greatly appreciate the insight.

Thanks in advance for your input and stay safe everyone!

Aloha,

Matthew Inouye

[Mitch Messer]

Hey @Matt Inouye, it's late in the day (and it has been a long one), so maybe I'm missing a few steps here, but...

Your note holder has an asset in his possession (your note) that he could choose to sell at any time. There are professional note buyers and brokers out there that purchase this kind of debt all the time.

You wouldn't be the buyer for this note; you're the payor/maker. You need a third-party note buyer.

Yes, these note buyers will be looking for a discount, but that's the cost of converting an income stream back into cash ahead of the agreed payment schedule. Your seller should be prepared for that reality.

So, while you could certainly help by introducing your seller to note buyers, I don't know that there's much more you should be doing in this situation.

I certainly would not be trying to retroactively adjust the purchase price.

What am I missing?