Tax implications on owner financing

Tax implications on owner financing

Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes

I have a seller that wants to sell me a house for $240k. He paid $90k. There is a $200k HELOC on it which they used to build their $600k house which is free and clear...technically. I am trying to convince them to put the $200k on the property they live so they can owner finance the property. They are considering it.

My questions....

1) Is there a tax advantage to seller financing if I gave them $40k down and $1200/mo until paid versus them getting a lump sum of $240k-closing costs?

2) Can they claim improvements like a pool or finished basement to reduce their capital gains? They think they can.

3) Is there something else I'm missing that could help me convince them, please let me know.

some background.....I have one owner financed deal. It was a simpler transaction because it was free and clear. This deal, I feel, is still possible because they can put the line of credit on their current home.

Thanks!

Creative financing...keyword

0Reply
25 views

Most Popular Reply

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y

The most important factor is whether or not this qualifies as their primary residence, which would make them exempt from all taxes on the gain. If so, they would just pay ordinary income tax on the interest collected.

If not, then is it a second home, or an investment? If there is any taxable gain, then yes, any capital improvements would raise their basis.

Obviously, they need to talk to an accountant.

See this reply in the discussion

8 Replies

Jump to latestLatest
  • Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    The most important factor is whether or not this qualifies as their primary residence, which would make them exempt from all taxes on the gain. If so, they would just pay ordinary income tax on the interest collected.

    If not, then is it a second home, or an investment? If there is any taxable gain, then yes, any capital improvements would raise their basis.

    Obviously, they need to talk to an accountant.

  • Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes
    13y

    This is a house they used to live in. They haven't for a couple years. They did rent it out.

  • Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    13y

    Perhaps someone can tag Steve Hamilton.

  • Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes
    13y

    I can't seem to get the @mention feature to work with Steve.

    Do you have to be a colleague?

    @Joshua D.

  • Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y
    Originally posted by Dan Costantino:
    I have a seller that wants to sell me a house for $240k. He paid $90k. There is a $200k HELOC on it which they used to build their $600k house which is free and clear...technically. I am trying to convince them to put the $200k on the property they live so they can owner finance the property. They are considering it.
    My questions....

    1) Is there a tax advantage to seller financing if I gave them $40k down and $1200/mo until paid versus them getting a lump sum of $240k-closing costs?

    2) Can they claim improvements like a pool or finished basement to reduce their capital gains? They think they can.

    3) Is there something else I'm missing that could help me convince them, please let me know.

    some background.....I have one owner financed deal. It was a simpler transaction because it was free and clear. This deal, I feel, is still possible because they can put the line of credit on their current home.

    Thanks!

    Creative financing...keyword

    @Dan Costantino ,

    When did the live in it last? If it was 24 months of the last 60 months before sale, then they can treat it as a primary residence and exclude the gain up to 500k. If they did not they are subject to recapture of their depreciation and then regular capital gain rates on the profit above that.

    Yes, they can include those items to offset the gains otherwise and they should have been taken into account when it was converted to a rental.

    If they cannot exclude the gain, their best bet is to owner finance to you and recognize the gain over as many years as possible until you can refinance them out of it.

    Higher price and lower interest are best. Be aware that your interest rate should be no less than 2-3% as the IRS can and WILL charge imputed interest if it is too low.

    -Steven

  • Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes
    13y

    I think they have lived there at least 24 months out of the last 60 months. Thank you for that info.

    I have never heard of imputed interest. My first deal is at 0%. I'll do some research on this.

    They are checking with their CPA...I just wanted to gather as much info on my end as possible. Thank you @Steven Hamilton II !

    I'll let you know how this goes.

  • Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y
    Originally posted by Dan Costantino:
    I think they have lived there at least 24 months out of the last 60 months. Thank you for that info.
    I have never heard of imputed interest. My first deal is at 0%. I'll do some research on this.

    They are checking with their CPA...I just wanted to gather as much info on my end as possible. Thank you @Steven Hamilton II !

    I'll let you know how this goes.

    @Dan Costantino ,

    They can exclude the gain even if you do an installment sale. The IRS can impute an interest rate upon the seller.

  • Rental Property Investor · Pittsburgh, PA · Member since 2013 · 178 posts · 57 votes
    13y

    Thanks @Steven Hamilton II

    I appreciate the insight.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.