Help: Creative Owner-Financing Solutions Needed

[Steven O.]

Hi BP,

The seller of our current home wants to sell it to us (he’s moved out of state and no longer wants to deal with responsibilities of being a landlord) and we’re looking for creative owner-financing deal structures to maximize the outcome for both buyer and seller. Owner will not put the property on the market or consider selling it to anyone else.

Details:

• ~$1.4M home price located in Los Angeles
• Seller owes $350k on the home
• Seller is in his mid 70s and is only looking for fixed monthly income out of the deal
• Property will be purchased and occupied by 4 individuals (2 married couples) - think of it as a duplex. It will be all of ours first home.
• We’re very friendly with the seller and both parties are interested in a deal that puts more money in the seller’s bank account, monthly and saves us buyers in the long term (ie: minimize taxes on the sellers side and minimizes loan interest paid on the buyer’s side as well as frees up down payment to be used on improvements)
• Seller will consider a “0 down, 0% interest loan” with a higher sale price (let’s say, $1.6M).

Initial Points of Consideration

• Could the seller sell it to us at a “loss” so that no capital gains are owed on his and then we gift the seller our monthly payments ($5k/month for ~27 years) - so that no income tax is owed (being 4 owners, we could gift the seller ~$60k/year)?
• Could the seller sell us us the house for $1 (or gift it to us entirely) and we repay him in monthly “gifts”
• Would it at all be advantageous to enter into some sort of “lease to buy” agreement and then be willed the property upon the seller’s death (he would write us into his will)? Then, at the point of his death, we would continue to pay what’s owed to the seller into a family trust of his, via monthly payments.
• What type of legal entities should we consider operating within as the buyers?

Main point is that we have a great relationship with the seller and both sides are extremely flexible in terms of creating an agreement that is mutually beneficial - thought neither of us have ever done anything like this. I will definitely consult my CPA and real estate attorney but wanted to reach out here to get some ideas started.

Thanks in advance.

[Jaysen Medhurst]

@Steven O., most of what you're proposing here is illegal. You're not going to fool the IRS by "gifting" the current owner $60k for 20 or 25 years. How would you even structure that? You'd have to have a contract of some kind. The contract would be proof of your conspiracy to commit tax evasion. No lawyer worth their salt would write it up and it would certainly be non-enforceable. 

Trying to game the system like this only leads to huge problems. Just figure out a fair price and terms. Capital gains taxes are the seller's problems. If he's so worried about them, there always a 1031 exchange. 

Make sure you've got an operating agreement with the other couple. Things might seem great now, but what happens if one couple wants to start having kids or decides to move to Maine and wants to sell. There are a thousand ways for this to blow up in your face.

Frankly, Steve, so much of this seems like a terrible idea.