Help structuring an offer on a 4 property deal?

Question

Hi all,

I’m working on an offer for a package of 4 properties, a 4-plex, duplex, and 2 SFR. The seller is hesitant because the duplex and one of the single families will be short term capital gains and he isn’t wanting to 1031 or take the tax hit as a short term.

We have a price agreed upon if I can help solve this for him. I’d like to figure out a creative way to structure a deal that would help him out and get me the properties.

Is this a place where I could possibly use subject to? I’ve never done a subject to deal, but very intrigued by them. His notes and Loan payment would be significantly lower than what mine would be so, if I could take over his payments that could be a win for me too.

I’m open to other ideas also. One of the properties needs about 6 more months until it would be a a year of ownership for seller.

Thanks in advance! Bryce

David M. · Answer

@Bryce Bunton

Oh, so its not really a flip then... Yeah, you aren't filing his taxes and its not your problem.  Normally, I'd wait the year...

You could do a subject to.  They have all their own issues.  But, that would work, but I'm not sure why he'd want to do it other than because he is trying to sell...  obviously, don't know his movitivations and situation to see if its worth it to him.

Bryce Bunton · Answer

@David M. one is rented already and the other one will be rented once he finishes it in a few weeks. It might not get rented until May 1 as that is when the new leasing year starts in this town.

I’m not familiar with the rules on flippers vs investors as i haven’t done any flips. Does that status change when it gets leased after an update?

Lots of people willing to roll the dice that they won’t get audited right now too,

David M. · Answer

@Bryce Bunton

As I feared, seller it wrong.  Flips are categorized by the IRS as a dealer selling inventory, not an investor selling an investment property.  Technically, the seller's profit is active, ordinary income subject to "all" taxes includes self-employment taxes.  If he gets audited, he'll have to show how its not a flip.  Technically, it doesn't matter if he holds it over a year.  Has he even tried to rent it out?

@Jake Wiley Yes, installment sales. Thanks.

So you could try an installment sale.  I haven't done one myself.  Maybe with traditional financing, you could close and withhold a chunk of cash in escrow and have it paid out in the next tax year.  It would just spreadout his "pain."

Bryce Bunton · Answer

@Jake Wiley thanks, I will do a little more digging into this see if anything will fit. Thanks, Bryce

Bryce Bunton · Answer

@David M. Yeah, both are complete flips, and the market we are in didn't really explode with appreciation until mid to late summer last year, kind of lagged most metropolitan areas, but it moved significantly since then. Seller has quite a bit of a gain, 100K+ and if it hits at the higher tax bracket, that's a big hit.

Jake Wiley · Answer

I think you are referring to an installment sale.   Haven't done one of these personally, but there may be a requirement for it to roll over calendar years?     Financing could be tricky if you are looking to lock in rates.    If that's the issue, I'd ask the lender if there is a way to buy in a longer lock period.

David M. · Answer

@Bryce Bunton

First, I'd make sure he knew what he was talking about..  Did he just reno or something?  How much capital gain can he really have in less than 12 months?  i.e. make sure he is calculating capital gain correctly.  For example, there has been a rash of threads here on BP recently with people trying to offset capital gains but they are calculating it complete wrong.

The term escapes me...  But, what about the technique where you pay for the property in installments?  So, you would close now, but actually pay him next year?  I THOUGHT the idea of that was this benefited the seller since he doesn't have to claim the income all in one year...

Kash Jawed · Answer

don’t you set a pre-determined rate in the lease option?

Bryce Bunton · Answer

Thanks @Lucas Miles, I like the lease option idea but not sure I want to delay the purchase with rates moving up between now and then. Not a deal breaker but something I want to keep in mind.

Lucas Miles · Answer

@Bryce Bunton if the main concern is short term capital gains on the 2 properties, an option is to do 2 separate transactions/closing. First purchase the properties that do not fall under short term capital gains now. Put the other properties under contract with a closing date of 6+ months so the seller gets the long term capital gains. Could also just put all properties under contract for 6+ months if that is easier.

Another option is a master lease (lease option often called) agreement. You are essentially leasing the property and then renting to the tenants like normal. In the contract you have the option to purchase in 6+ months. You can get control of the property right away, but the actual closing won't happen until later on. Work with a attorney to draft these documents for you.