Exploring Creative Solutions for Down Payment and Tax Avoidance

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Exploring Creative Solutions for Down Payment and Tax Avoidance

Tyler SpeelmanPro Member
Rental Property Investor · Maria Stein, OH · Member since 2018 · 75 posts · 48 votes

I have a sibling who is looking to sell two single-family rental properties but is concerned about the tax implications. Currently, he rents and needs a down payment to purchase a primary residence. We're exploring creative ways to provide him with the cash needed for the down payment while avoiding triggering a taxable event.

One strategy we're considering is purchasing his future primary residence ourselves, making the mortgage payments, and then, once we've built enough equity—comparable to the appraised value of his rental properties—transferring the title to him as a form of exchange.

What are your thoughts on this approach? Additionally, do you have any other ideas or strategies that might help achieve his goals without incurring a tax liability?

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Gamal HardingBusiness Member
Property Manager · Columbus, OH · Member since 2018 · 34 posts · 37 votes
1y

Hey @Tyler Speelman- 

2 options to consider:

1. Seller finance the property- ask for an up front, non-refundable down payment of $XXX (which could be used as his primary residence down payment), payments of $X over X years at X interest rate with a balloon payment in X years

2. Take out an equity line of credit on the property that can be sides as the down payment for the primary residence. They may need to be careful on this one as that may impact his DTI ratio. if his income is strong enough and not as much debt, he should be OK


Hope that helps..

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  • Matthew Becker
    Developer · Moscow Idaho · Member since 2024 · 224 posts · 143 votes
    1y

    I can probably help you I have done a lot of private deals and I don't pay taxes.  I have some question.  How much does he owe on each property, what is his basis and how much are they worth?   How much does he want to spend on a house?  How much cash do you have available?  With this info I can probably point you in the right direction.  In general I would come up with a solution and tell my accountant what I am doing.  I just did a deal very similar to this with a couple houses.  

    1Reply
  • Tyler SpeelmanPro Member
    OP
    Rental Property Investor · Maria Stein, OH · Member since 2018 · 75 posts · 48 votes
    1y

    @Matthew Becker

    Mortgage balance:

    1. None.

    2. $66,763.

    What is his basis?

    1. $197,900

    2. $126,000

    Worth?

    1. 380k

    2. 280k

    He wants to spend $350-400k on primary.

    Cash available: 100k

    0Reply
  • Matthew Becker
    Developer · Moscow Idaho · Member since 2024 · 224 posts · 143 votes
    1y

    I have to eat I will get back to you in the moring.  I am on vacation so I am a bit behind. 

    1Reply
  • Matthew Becker
    Developer · Moscow Idaho · Member since 2024 · 224 posts · 143 votes
    1y

    OK Sorry for the delay.  I did not do computer time today.  Just enough time to return emails.  

    I have more questions.  - Does he want to retain some owner ship?  Is he just looking to have no house payment?  

    Total Value $660K. 

    Basis - $323K 

    Debt $66K 

    Liquidation Cost estimate 10% if he sells through broker - $66K.  This can be less I just use this as a conservative estimate because the math is easy.   

    Cash Equity. $528K.  So you should make sure he does better than that so it is good for both of you.   

    I can't stand Dave Ramsey because he advises people with out asking 100 questions that you should before you give advice like this.  You really have to understand people situation a lot more before giving advice.  I would rather talk to both of you for a hour and advise.    I do deals with friend and family and they are loose because I trust them.  So that has a lot to do with it.  

    Credit, jobs, income, age, married, plans for future all this matters. If he makes less 94K a year and married he can take advantage of zero tax rate which would come into play.  You can structure the deal to pay him gains at a zero federal tax rate.  

    If he is ok with not owning the properties  The easiest thing to do is buy him a house.  He sells you his house for his basis $323k carries the note.   He buys a house for $500K and you pay it off.  Then you owe hime another $40 to $100K depending on how you figure it out.  You and your husband gift him $19K each.  If he is married you can each give him and his wife $19K x 4 =  $76K  in one year.  Or hand him an envelope with $100K in it.  People love cash.  

    He will be allowing you to leverage your money with his this is very good for you.  

    I am not a tax adviser and barely graduated high school so I am not sure if I would listne to me.  There are a lot of ways to skin this cat. 

    If you don't have a great accountant which most are not.  I have one that is awesome and smart and specializes in Real Estate tax planning mostly because he is an investor as well so he is really good at what he does.  


    1Reply
  • Gamal HardingBusiness Member
    Property Manager · Columbus, OH · Member since 2018 · 34 posts · 37 votes
    1y

    Hey @Tyler Speelman- 

    2 options to consider:

    1. Seller finance the property- ask for an up front, non-refundable down payment of $XXX (which could be used as his primary residence down payment), payments of $X over X years at X interest rate with a balloon payment in X years

    2. Take out an equity line of credit on the property that can be sides as the down payment for the primary residence. They may need to be careful on this one as that may impact his DTI ratio. if his income is strong enough and not as much debt, he should be OK


    Hope that helps..

    10X Property Management4158 Reviews
    WebsiteView Page
    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Tyler Speelman Your strategy to assist your sibling with a down payment while minimizing tax liability is creative but comes with complexities. Transferring a property title later could be deemed a taxable gift if it exceeds the annual exclusion ($17,000 for 2024). Alternatively, your sibling might use a 1031 exchange to defer taxes by reinvesting in like-kind properties, though this doesn't directly fund a primary residence.

    Other ideas include leveraging a HELOC on the rental properties for the down payment, taking out a 401(k) loan, structuring an owner-financed agreement, or a lease-to-own arrangement. Selling the rentals via installment sales could also spread out tax liability.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    1y

    @Tyler Speelman, A 1031 exchange solves the tax issue.  But you cannot exchange from an investment property into your primary residence.  However, a multifamily purchase could work quite nicely.  If the sale is for $600K then you need to purchase $600K of replacement investment real estate.  However, it could also be a 4 plex worth $800K.  The investment portion of 3 units equals their reinvestment target of $600K.  And the other unit worth $200K could be used for their primary residence.  Works just as well for a two family worth $1.2.

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  • Daniel Osman
    Accountant · 1031 Exchange Qualified Intermediary | Nationwide · Member since 2024 · 53 posts · 32 votes
    1y

    @Tyler Speelman Hey! This actually seems like a great scenario for a 1031 exchange based on what you've said. If I understand correctly your siblings goals are to sell their rental properties, use the funds to purchase a primary residence they'll eventually move into, and limit their tax liability correct?

    Your sibling can use a 1031 exchange to defer capital gains taxes on the sale of the rental properties by reinvesting the proceeds into like-kind investment properties. They can rent the property they purchase to you (or anyone).

    The property must be held for investment purposes for at least 24 months immediately following the exchange. During this 24-month period, the property must be rented to another person at a fair market rental value.

    After the 24 month period your sibling could convert it into a primary residence. This not only defers the taxes on the two rental properties but then once they live in the primary residence for at least 2 years that home now qualifies for the Section 121 exclusion on the gain. This strategy allows them to eventually exclude up to 250,000 (500,000 if married filing jointly) of gain from taxes when they sell the property as a primary residence.

    Hope this helps! If you have any questions let me know.

    2Reply
  • Matthew Becker
    Developer · Moscow Idaho · Member since 2024 · 224 posts · 143 votes
    1y

    1031 arms length could be risky?

    0Reply
  • Matthew Becker
    Developer · Moscow Idaho · Member since 2024 · 224 posts · 143 votes
    1y
    Quote from @Daniel Osman:

    @Tyler Speelman Hey! This actually seems like a great scenario for a 1031 exchange based on what you've said. If I understand correctly your siblings goals are to sell their rental properties, use the funds to purchase a primary residence they'll eventually move into, and limit their tax liability correct?

    Your sibling can use a 1031 exchange to defer capital gains taxes on the sale of the rental properties by reinvesting the proceeds into like-kind investment properties. They can rent the property they purchase to you (or anyone).

    The property must be held for investment purposes for at least 24 months immediately following the exchange. During this 24-month period, the property must be rented to another person at a fair market rental value.

    After the 24 month period your sibling could convert it into a primary residence. This not only defers the taxes on the two rental properties but then once they live in the primary residence for at least 2 years that home now qualifies for the Section 121 exclusion on the gain. This strategy allows them to eventually exclude up to 250,000 (500,000 if married filing jointly) of gain from taxes when they sell the property as a primary residence.

    Hope this helps! If you have any questions let me know.


     Dan seems to kmnow what he is talking about 

    2Reply
  • Daniel Osman
    Accountant · 1031 Exchange Qualified Intermediary | Nationwide · Member since 2024 · 53 posts · 32 votes
    1y

    @Matthew Becker Thanks! 

    The rules are designed to prevent related parties from engaging in exchanges that shift high basis property for low basis property, followed by a sale of the low basis property, effectively "cashing out" without recognizing gain.

    If you sell a property to a related party as part of a 1031 exchange, both you and the related party must hold the exchanged properties for at least two years following the exchange. If either party disposes of the property within this period, the exchange may be disqualified, and the deferred gain may be recognized.

    If you are renting to a related party everything just has to be done at fair market value. 

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