Subject To and Owner financing

[Owen Schwaegerle]

Hello BP Creative Financing Wizards!

I'm trying to put together a deal to help the seller mitigate and pay less capital gains taxes up front. He's owned the property for 20+ years and doesn't want to pay a massive capital gains tax. He got the property for $505K back in the early 90s, and I think he's willing to sell it today for $1.4M. He currently has a first note on the property for $630K. The offer I proposed was to purchase the property subject to the existing mortgage and then have him carry back the remaining balance and make him monthly payments. He proposed this idea to his CPA and said it wouldn't work because he would have to pay too much capital gains taxes up front on the down payment. I told him there would be no down payment in the proposed scenario, and he said he and his CPA might not have understood that. 

Is there a way to structure a deal with subject to and owner financing where the seller pays very little to no capital gains taxes up front?

Thank you all for the unput!

[Wayne Brooks]

The seller pays capital gains tax on money Actually received.

The basic math…

In your example, the seller’s cap gain is approximately 2/3 of the sales price, so….whatever principal he receives (interest is taxed as ordinary income) 1/3 would be return of basis, 2/3 would be capital gains….that is the basic math.

You’d have to deduct out any 121 exclusion if this is his primary from the above calculation and add in depreciation recapture if it is a rental, but that’s the method.