Tax implications on owner financing

[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

[Wayne Brooks]

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.