Killer deal but how to structure?

Question

Hi there, I have a seller wanting to sell a fourplex and duplex but is trying to delay it till 2025 because of the capital gains she would accrue. Regardless, she is open to seller financing it over 30 years at 5%, but interesting enough she does not want to have to pay capital gains tax on the payments for this year or the down payment. How might I work around this and creatively structure it such that I can buy it this year and she doesn't have to pay tax on it until 2025? Any creative things you can think of? Thank you!! :D

Derek Nemec · Answer

Have you heard of the installment method of income tax accounting.?

Jaron Walling · Answer

I think the seller has unrealistic expectations. How is one year going to make a difference? I'd ask them what the capital gains are worth to them. Maybe a higher PP pushes them past the pain of paining Uncle Sam. Maybe not. Getting creative is not always the best solution.

Dave Foster · Answer

@Derek Nemec, Your seller could sell to you (with or without a note) and start a 1031 exchange.  As long as you don't purchase it until after 7/5/24 their exchange will end in 2025.  which means they will receive their proceeds (or the note) in the next year.

When doing a 1031 exchange the accountant has the option to treat a failed exchange as an installment sale with all of the proceeds received at the end of the exchange period.

Derek Nemec · Answer

Yes it implies a tax event, but utilizing the installment method would alleviate it?

Tyler Hill · Answer

Spit balling here.Could you setup an interest only payment for the first year?  1/1/25 could be a date for a balloon payment of the amount of your down payment. The remaining amount could then continue on a seller financed 30 year amortization at 5%.Again, I'm just spit balling. I'm not a tax professional. I'm not sure if this solves the sellers problem

Derek Nemec · Answer

I appreciate your feedback! Nonetheless, I do want to ensure a deal is possible and not 9 months down the line so trying to be creative is means for making it work not letting it go! I was thinking, if possible, a partial balloon payment due on 1/1/2025 in replacement of the down payment would be a good proactive structure that would suit us both, but never heard of that being done.

Rick Pozos · Answer

Mentioned above: Lease all the properties at a certain rate. Pay an extra 5k for the option to purchase the whole deal on 1/1/25 to 3/31/2025 at XX price. In the mean time, you are renting from the owner, but sub-leasing to the tenants that are there.

Once you purchase with the installment sale in 2025, the tax man cometh. But it is with the installment sale parameters.

William Hochstedler · Answer

You can't know how a deal structure will impact the seller's tax liability without knowing their whole financial situation.  That being said, I offer to pay for a consultation with a CPA.  Once the seller understands how much tax they'd owe in various scenarios, you can tailor the deal to maximize benefits.

Craig Parsons · Answer

Yes Derek yo are on the right track for sure I have bought multiple properties in the past using this method as a reason the owner should owner finance instead of bank financing.  Go get some!

https://www.irs.gov/publications/p537#en_US_2023_publink1000...

Craig Parsons · Answer

I am not sure that is true if the seller uses the installment method as defined in the IRS publication

https://www.irs.gov/publications/p537#en_US_2023_publink1000...

The way that I understand it is if a seller uses the installment method only the portion paid of the capitol gains paid in any year are taxable as capital gains and can therefore be spread out over time.

Killer deal but how to structure?

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