Seller financing on STR

[Matt Silverstone]

I found a seller who has been managing a STR since purchase on April 2022. They put 10% down and spent $$ on furnishing. Seller still has a loan with the bank. He is looking to sell and do a 1031 to some properties closer to where they live. Seller did cost seg bonus depreciation to accelerate depreciation schedule. Seller doesn't want to pay recapture tax and is mindful of a solution to defer depreciation.

if we do seller financing, will seller have to pay recapture money? Ideally I’d like to structure a deal with seller financing as traditional bank terms are too high right now and then do a cost seg bonus depreciation on my side to take similar advantages while self managing to off set W2.

Curious thoughts on a solution to solve sellers and my needs.

thanks!

[Dave Foster]

@Matt Silverstone, If the seller does not do a 1031 exchange they will pay all tax and depreciation recapture.  It will just be spread out a little.

There is a way to use a 1031 exchange with owner financing.  If they have access to cash from somewhere else, they can put the note and the down payment into the 1031 exchange.  And then prior to the purchase of their replacement property they swap the note with cash.  So their 1031 account has the right amount of cash for their purchase.  This indefinitely defers all tax and depreciation recapture.

Outside the exchagne they now own a note which they paid face value for.  So the note is now tax free except for the interest paid.

I have a video that I'll send to you via pm.  BP won't let me post here.