Seller Financing Tax Benefits to the seller?

[Mallikarjun Reddy Pateel]

I'm currently in talks with a Senior Owner to buy his 10 Unit Rental Property through Seller Financing. i have couple of questions Regards to tax benefits to him. so I can speak more Confidently about this deal.

Numbers are not accurate Let's take some assumptions

he bought the property in 1970 for $100k. I'm giving him Purchase price of $1M. zero down Pay. 30 years term @5% Interest Rate.

1. his Capital gains will be $900k(Sale Price - adjusted basis) which will be charged at 20% Long term capital gain. which triggers $180K in Federal Tax and not Including NJ state Tax, if he sells at one shot. but if we do Seller Financing I guess his Principal and Interest Payments will be taxed at ordinary tax rate based on his Tax Brackets over 30 years of our Loan term. in this seller Financing is he Paying same amount back to the Gov. in taxes as he would pay in One time sale or is he benefiting from seller financing by offsetting Taxes?

2. when does the Depreciation Recapture triggers in this seller financing? at the end of 30 Year Term? i think he only paid $100k back in 1970 he might only depreciated the same amount over 39.5 years and any Improvements he made. will this Depreciation Recapture can be a Disaster for my seller doing seller financing? or it's still a Good deal for him?

I appreciate any thoughts on this. Thank you!!

[Ashish Acharya]

Originally posted by @Mallikarjun Reddy Pateel:

I'm currently in talks with a Senior Owner to buy his 10 Unit Rental Property through Seller Financing. i have couple of questions Regards to tax benefits to him. so I can speak more Confidently about this deal.

Numbers are not accurate Let's take some assumptions

he bought the property in 1970 for $100k. I'm giving him Purchase price of $1M. zero down Pay. 30 years term @5% Interest Rate.

1. his Capital gains will be $900k(Sale Price - adjusted basis) which will be charged at 20% Long term capital gain. which triggers $180K in Federal Tax and not Including NJ state Tax, if he sells at one shot. but if we do Seller Financing I guess his Principal and Interest Payments will be taxed at ordinary tax rate based on his Tax Brackets over 30 years of our Loan term. in this seller Financing is he Paying same amount back to the Gov. in taxes as he would pay in One time sale or is he benefiting from seller financing by offsetting Taxes?

2. when does the Depreciation Recapture triggers in this seller financing? at the end of 30 Year Term? i think he only paid $100k back in 1970 he might only depreciated the same amount over 39.5 years and any Improvements he made. will this Depreciation Recapture can be a Disaster for my seller doing seller financing? or it's still a Good deal for him?

I appreciate any thoughts on this. Thank you!!

With that kind of gain, he is going to save thousands of dollar. However, I would be careful with the proposed tax hike.

He will pay capital gain, not ordinary gain 

The gain that he will recognize with each year’s payments would be the recapture first. After entire recapture is recognized, he will start the cap gain recognition. 

With installment sale, he is going to avoid the extra 3.8% NIItax vs. without installment sale. That can be significant for him as well. 

We can’t say how much he will end up paying because each year might be different. If there are years when he is in the lower cap gain bracket, he would pay less compared to at once total and vice-versa. The 30 years is a long time and the rate is destined to change as early as next year with the Biden’s proposal. 

It might be a bad deal for him if he is expected to receive his social security benefits in the next 30 years, if he hasn’t already received it.