Capital Gains for owner financed property

[Simon S Marthinsen]

I’m talking to a seller about purchasing his 26 unit 1/1 building. Sales prices is between1.8-2 million. The property is off market but he is interested in selling. His worry is capital gains. He as owned the property since 2000.

If he sold it to me with owner financing, when is his capital gains due?

At the sale or over time? He is aware of 1031 but has no leads on another property.

I’m open to any ideas on how to structure the deal.

Needs $400k reno

26 units

Market rent is $950 before reno. Could probably get $1050 if renovated.

It’s in an excellent neighborhood with strong potential for appreciation.

I have considered FHA 223(f) financing and making it a government subsidized building for seniors. Advantage with this is the super low down payment.

[Nicholas Aiola]

@Simon S Marthinsen @Bjorn Ahlblad @Hadar Orkibi

This is a common misconception with "depreciation recapture" by investors and CPAs who do not specialize in real estate.

There are two types of depreciation recapture, depending on the asset type: Section 1250 (real property) and Section 1245 (personal property). Unrecaptured Sec. 1250 gain is the depreciation recapture most people are referring to when talking about depreciation on a residential rental property. This does qualify for installment treatment - each year's reportable share of the gain must first be allocated to the unrecaptured Sec. 1250 gain until it is extinguished and the remainder will be taxed as a capital gain for the duration of the installment period.

See Reg. 1.453-12 for further guidance and examples.