Selling rentals with seller financing

[Oke Tammik]

Hello everyone. I'm curious about what people think about using seller financing as an exit strategy for rentals? I'm legitimately curious whether anyone is considering this as an option, and if so, why? Obvious tax benefits from a long-term capital gains standpoint, but also the downside of having to pay depreciation recapture tax (flat tax of 25%, if I recall). I would think some folks are thinking about selling with rent payment moratoriums, increasing regs, and (if in Portland, like me) continuing increases in property taxes. I'm just trying to learn about the difference in strategy, sell & carry note versus hold onto rental. Thanks for your thoughts! 

[Bill Exeter]

Hi @Oke Tammik, 

It is a viable exit strategy if you do not wish to remain in real estate.  You are essentially "cashing out" by selling your property and then deferring some of the taxes over the term of the seller carry back note(s).  Keep in mind that if they buyer (borrower) decides to pay you off early it will trigger the deferred taxable gain.  

The sale with a seller carry back note essentially triggers the taxable gain, but defers some or all of the taxable gain over the term of the note.  

There is no right or wrong answer here.  It just depends on what your goals and objectives are. 

We see lots of our clients selling and then 1031 Exchanging into geographic areas that make sure more sense (cash flow, lower property taxes, less regulatory/legislative threats, etc.