Owner finance of 18 Units -- 0% loan any tax issues?

[John Jolly]

What are the tax implications to the seller of this 0% loan?

The seller's attorney is against this type of deal citing IRS problems-- anyone out there with some experience rebutting this issue?

I have done deals like this before and there was no issue-- is this a new IRS rule?

[Brandon Hall]

@Russell Brazil and @Wayne Brooks are both correct.

It first depends on who the seller is. If the seller is a family member, you'd be better served charging a fair interest rate less you want to involve yourself with "arms length transaction" and gift rules.

If the seller is not a family member, you can at least avoid the above rules, but now you have to worry about imputed interest and net investment income calculations.

Basically, even if you and the seller specifically agree to a 0% loan, the IRS (under audit if not found out sooner) will come back and decrease the selling price and add in imputed interest, requiring the seller to report interest income at his/her ordinary rate vs capital gains.

Example: Contract price is for $100k, 0% down 0% interest. IRS will say "no, contract price is for $85k and $15k is interest."

Don't want to skirt the rules here as interest income can scale your tax liability up quickly and may cause tons of costly problems in the future.

The IRS has a rate table which is updated monthly here.

@John Jolly