Seller Financing for Portfolio of Homes - Good, Bad, Etc...???

[Daniel Dietz]

Cross Posted here 

Hello,

I am in VERY early stages of possibly being able to buy a portfolio of properties from a local investor who is well into retirement and might be ready to bow out. For simplification, Ill use round numbers. I want to make sure this could be good for HIM and us. He would likely invest in lower return things like bonds, CDs etc....

Properties worth say $1,000,000 owns free and clear. They would be buy and hold. Let say he had purchase price of 750K, and depreciation of 250K, so 500K basis.

If he sold outright for $1,000,000 sale price out right sale. I assume he would have a tax bill of roughly 62.5K on the recapture, and 38K-50K on the long term gain, for a total of 110K in taxes and a 6% sales commission of 60K for about 830K in pocket (ignoring state tax for now)

If we did a seller finance deal at $1,000,000 sale price, no realtor, 100K down. 900K balance @ 5% interest amortized over 20 years with a balloon to be determined.

• I assume there would be the 62.5K due on sale for recapture tax. Part of the thought of the 100K down is to have enough to pay this upon sale.
• I assume the 100K down would be taxed as 50% basis, 25% CG, and already paid the 25% recapture?
• If our yearly principal portion of payment was say 30K, only 25% of that would be taxed at CG rate since 50% of it is basis and 25% has already be taxed at recapture rates?
• Interest would be taxed at his normal tax rate.
• If our balance was say 750K when we paid him the balloon, that would be taxed at 187.5K (25% that is capital gain) since 50% is still basis and 25% has already been taxed at recapture rates. Does that make sense?

Am I on the right track for us to analyze this deal?

Thanks, Dan Dietz