Seller Financing from a 100-Year-Old Neighbor

[Kelby Schimming]

Hi BP, 

I am trying to work out a seller finance deal with my neighbor who is 100 years old. The property is a duplex, and he plans to give all the proceeds from the sell to his daughter. Her plan is to get the absolute most she can from the duplex so I suggested seller financing. I am just unsure if we can avoid capital gains taxes if we do the seller financing route. 

His wife passed in May of 2023 so we are trying to work out a deal before May 2025 so we can avoid the capital gains taxes. He has lived in the duplex for the last 20 years and according to my research, you can avoid taxes on capital gains up to $500,000 if the property is sold within two years after a spouse's death. Correct me if I am wrong, please!

If we do a seller financed deal, can we still avoid the capital gains tax? 

Is there a way we can do a seller financed deal and still avoid the capital gains tax? 

Any insight would be appreciated. 

I can provide more info if need be!  

TIA!

[Kelby Schimming]

or when the daughter inherits the property, could she immediately sell it to me via seller finance to avoid capital gains tax? the purchase price would be the stepped-up cost of the asset. with this, she would only pay tax on the interest earned, correct? 

[Chris Seveney]

Quote from @Kelby Schimming:

Hi BP, 

I am trying to work out a seller finance deal with my neighbor who is 100 years old. The property is a duplex, and he plans to give all the proceeds from the sell to his daughter. Her plan is to get the absolute most she can from the duplex so I suggested seller financing. I am just unsure if we can avoid capital gains taxes if we do the seller financing route. 

His wife passed in May of 2023 so we are trying to work out a deal before May 2025 so we can avoid the capital gains taxes. He has lived in the duplex for the last 20 years and according to my research, you can avoid taxes on capital gains up to $500,000 if the property is sold within two years after a spouse's death. Correct me if I am wrong, please!

If we do a seller financed deal, can we still avoid the capital gains tax? 

Is there a way we can do a seller financed deal and still avoid the capital gains tax? 

Any insight would be appreciated. 

I can provide more info if need be!  

TIA!

First, I would never try and provide tax advice to a seller, it will get you sued, especially to a 100 year old person.

Regarding seller finance, since the amount is spread out over long term, they should check with their CPA on how they are or are not taxed on the gains as well as interest on the loan. There best move would be to put the property in a trust and not sell it until after the current homeowner passes away as that may allow the daughter to get a step up and then sell.

Also, seller financing does not always net the highest price - and there is the issue of the seller having now to hope a loan does not go into default.