Suggestions for grandpa getting rid of office building?

[Kyle Bartholomew]

Hi everyone, I have an 85 year old grandpa-in-law that owns an office building in MI. Recently, he expressed interest in selling it to me and my group of real estate partners. This would be my first real estate deal with them. I have about $25k cash to work with on my end and my partner could make about $100k available.

He absolutely does not want to pay any capital gains on a transaction of this property, so I am trying to get some ideas of the ways around this. He would want a monthly payment plan from me to him until he dies so that he is still making a little off of it. He also wants no mortgage on anything.

The building is currently worth anywhere between $700k-$1mil and his basis in the property is roughly $120-150k because he purchased the land and built it in 1965. It is obviously fully depreciated. The building is fully leased and has positive cash flows of about $5,000 a month according to him (I need to verify that with his records).

He did a cash out refi on about $300k a couple years ago so the mortgage is still close to that, let’s say $290k.

The issue with a 1031 exchange would be that he doesn’t have any additional cash laying around, so even if the sales price was $290k, that would go directly to the mortgage payoff and he would have $0 to move into a new property. A sales price of $450k would leave $160k to move into a new property, but that would leave $290k of unused 1031 exchange which would then be taxed.

My thought is that if he would be open to moving it into a new real estate partnership with me, then I can run the building and set up a monthly payment plan with him out of it.

He also has 2 children that this asset would fall to when he passes away, one is my mother-in-law and the other is a son.

If he were to pass away today, they would probably be able to sell the building for $700k because neither of them wasn’t to run it. They should also get a step up in basis to the $150k basis. So if my math is correct, it would be $700k sales price minus $290k mortgage, so $390k...Take away the step up in basis,it is about $240k taxable sale.

I feel very lost on this and would appreciate any options to try and keep this in the family to be able to keep a great cash flowing property alive. Thanks everyone!