Question re: Tax implications for Seller leaving money in the deal

[Shan Radhakr]

I wanted to ask a quick question to see anyone here has bought a property where the Seller is leaving money out of the deal's proceeds in the deal? I'm trying to figure out if the Seller will be taxed immediately on that money if they never touch it and it remains in the deal.  The Seller is not interested if there is immediate tax payment.   

If anyone has done something similar, I'd like to get some insight on how the deal was structured.  

Thank you. 

Shankar

[Livia Adams]

Hey, could you elaborate what you mean by "leaving money out of the deal's proceeds in the deal"? Can you give me the exact situation? Thanks!

[Shan Radhakr]

Sure, @Livia Adams, let's say the purchase price is $5m. The buyer has secured a loan for $3.0m for the deal. The remaining equity needed is $2m. The buyers have $1.5m and are short by $0.5m. The Seller is interested in leaving up to $0.5m as a preferred equity/debt as long as she doesn't have to pay tax immediately on the $0.5m that she doesn't receive on closing.  How should the deal be structured to not trigger tax payment for the $0.5m that she is leaving on the deal?  This is the exact situation.  

[Livia Adams]

Oh got it, thanks for the explanation.

I am not an accountant or attorney but from a  law point of view I believe that as long as the equity is bound in the property it is not realized capital gains so it won’t be taxed.

You could structure it as a deferred payment due at some point in the future making it taxable at that point. I would advice though to have the backing of an attorney on this for liability reasons.

[Shan Radhakr]

Thanks for your suggestion @Livia Adams.  

[Bob P.]

Quote from @Shan Radhakr:

Sure, @Livia Adams, let's say the purchase price is $5m. The buyer has secured a loan for $3.0m for the deal. The remaining equity needed is $2m. The buyers have $1.5m and are short by $0.5m. The Seller is interested in leaving up to $0.5m as a preferred equity/debt as long as she doesn't have to pay tax immediately on the $0.5m that she doesn't receive on closing.  How should the deal be structured to not trigger tax payment for the $0.5m that she is leaving on the deal?  This is the exact situation.  

That's called a "seller carry back" and the seller can elect to be taxed on only money received. The payments each year would be taxed for that year. Or, if it is treated as a balloon, taxes are due when balloon is paid.

[Shan Radhakr]

Thank you @Bob P.  Have you done this kind of transaction?  If so, I'd love to have a quick chat with you.  Thank you.