Rental Property Investor · Portland, OR · Member since 2015 · 96 posts · 23 votes
Hi all, I am in the process of writing an offer for a farm property that we would utilize as our primary residence, but that also has potential to generate multiple streams of income. I have a friendly relationship with the seller who inherited the property from his parents in 2015. I would estimate that the value of the home in 2015 would have been around $350,000 and estimate that the current value is between $600,000 and $650,000 (the increase is due to improvements and appreciation). The seller moved to the property about ten years ago to help take care of his parents and has lived their full-time sense. It is my understanding that the seller should qualify to exclude up to $250,000 of any gain from his income.
My question: If we were to utilize seller financing with a sales price of $600,00 and down payment of $60,000, would the seller miss out on the capital gains exclusion because he is not earning at least $250,000 in the year of the sale? Also, how does the mortgage interest that he would be earning impact the benefits/drawbacks of seller financing (for the seller). Basically, I am looking for ways that owner financing might benefit the seller in this situation. Thanks!
Believe it or not, the IRS website is a great place to find information. I didn't know the answer regarding combining the section 121 exemption and an installment sale, so I looked it up (https://www.irs.gov/taxtopics/...):
"If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available. Refer to Publication 537, Installment Sales, Form 6252, Installment Sale Income, and Topic No. 705, Installment Sales, for more information on installment sales."
Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
4y
If the 250k doesn't happen in one tax year then I would doubt the tax advantage carries forward. But really this is way too technical a question to ask a forum. You get what you pay for here.
Your cpa can help him with the sale, or offer to have your cpa do a call with him. Too personal to learn all seller's finances anyways.
Rental Property Investor · Portland, OR · Member since 2015 · 96 posts · 23 votes
4y
@Allan Smith
Thanks Allen. Yeah, obviously I am not trying to give the seller tax advice - just looking to frame the offer around some potential benefits that the seller would gain through owner financing.
Flipper/Rehabber · Amboy, WA · Member since 2019 · 33 posts · 28 votes
4y
Todd - Thanks for asking this question, it is very similar to our situation.
We are looking to purchase a property with a second placement manufactured house on it, we would also use it as our primary residence and have been looking at options for financing, (we do not qualify for VA), we would rent the RV pad and possibly the pasture for part of the year so it does have some potential rental income.
I'm thinking about making an offer with seller financing. Depending on what our current primary residence sells for, we may be able to offer $50k - $70k down.
Believe it or not, the IRS website is a great place to find information. I didn't know the answer regarding combining the section 121 exemption and an installment sale, so I looked it up (https://www.irs.gov/taxtopics/...):
"If you sold your home under a contract that provides for all or part of the selling price to be paid in a later year, you made an installment sale. If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section 121 remains available. Refer to Publication 537, Installment Sales, Form 6252, Installment Sale Income, and Topic No. 705, Installment Sales, for more information on installment sales."