Creative ideas for this property acquisition?

[David Hayes]

Hello BP community, I have a question for you, I’m assuming someone has tried something like this but I can’t seem to find much information out there, so maybe not. Here is my situation:

We have a motivated seller, he has a 4 unit apartment building (technically fee-simple townhouses, they are all separate parcels, but not really important in this discussion) he would like to sell. He has owned them for a long time so they are fully depreciated, but he has refinanced them multiple times – so he still has a pretty high mortgage. My understanding is he will have to pay capital gains tax on almost the entire value of the sale price (minus land value and any capital improvements) since they are fully depreciated.

The problem we are trying to solve for: Is there any way to transfer the property to us where he can avoid paying the taxes?

Our thought for a creative solution…we form an LLC together, he transfers the property into the LLC, we refinance the property to pay off the old mortgage and give a "buyout" to the seller for his position in the LLC at a later date. At the end of the day we have full ownership of the property and equity in our LLC for no money down and seller is happy because they got more money than they would have selling traditionally. Is this legal? Is there other ways to do this?

Here are some numbers we are looking at:

If the seller sells on the open market, this would be his approximate situation:

Sale price = $200,000

Realtor commissions (6%) = $12,000

Payoff mortgage = $125,000

Money back before taxes = $63,000

Tax bill (assume taxable gain of $150,000, capital gains of 28%, state of 5%) = $38,000

Net money to seller = $25,000

If we transfer the property into the LLC, here is how we are thinking about it:

Asset contribution value to LLC = $175,000

Refinance (75% of $200,000) = $150,000

Payoff old mortgage = $125,000

Money to seller = $25,000

Remaining seller equity in the LLC (to be paid out in an agreed upon time frame, 5yrs?) = $25,000

Has anyone tried anything like this? Is there better ways to structure this deal or make it a win-win? Our goal is to acquire the property with little or no money down, sellers goal is to get out and have the most money in his pocket with the least amount for the government. And of course we want to make sure we are doing everything legally.

Any feedback is appreciated.