All Forum Posts by: Nik Divakaruni

Of course I'm speaking with my CPA and attorney, but there have been enough times where me (or a partner) have come up with an idea that neither of them did.  Crowdsourcing creative ideas isn't anything new.  

Purely asking if someone has gone through this before, and if there are things I'm not thinking about.

I don't disagree - if it were easy, I'd do it.  But the 5.5% is north of $200k.  The easier way would be for the buyer to assume the full cost of that (it's split 2.75% each normally) and if he wants to do that, then he can take it.

@Eamonn McElroy @Basit Siddiqi

I left out a key detail of this Entity Sale. I need to be at least an 11% owner of the LLC in order to avoid a transfer tax of 5.5%. That's the whole reason we're doing an Entity sale.

With that said, any ideas?

I've got a doozy here.  If anyone has a good solution for this, I will be hugely grateful.

My wife and I are currently the owner of an LLC with 30 doors across 6 properties. We've been approached by a buyer to purchase the LLC from us (and subsequently all the assets) for a price, but he wants us, as sellers, to carry a loan. He's agreed to take over all costs, and will be entitled to all income from the properties during the time he's paying off the loan.

If we move forward with this, I assume we would have to now file a K-1 as the LLC is no longer a pass-thru entity for my wife and me. The buyer will have the full P&L on his K-1.

We still carry a note for the properties (one note, thankfully).  The buyer would, I assume, take out a loan to buy our business.  That loan will be between me and him.  

Here's my question: Since the LLC has the existing note for the properties, and the interest the buyer would pay me would be personal, I would owe tax on the entire interest income from his loan, and since the interest expense on the existing note is through the LLC, I wouldn't be able to offset the two, right?

Further, since the buyer would take over all costs and income, he would be able to write off the interest from his personal loan to me against the business (since it's being used for business purposes) AND would be able to write off the mortgage interest from the bank note (since it's in the LLC).

Is there a solution here, where I can deduct the interest on the note through the LLC, from the interest income I'm making off his personal loan? Also - does someone potentially have a better way to structure this deal so I'm not getting hosed on the tax consequences of the interest income?

Any advice would be greatly appreciated.  Thanks!

All, apologies. I've been very inactive on BP over the last few months.

Long story short, I ended up syndicating the deal, but took F&F money, so my promised returns were a little more modest than I would have had to offer a more sophisticated investor.

We purchased 40 units in Pittsburgh, PA (my hometown).  So far, typical speed bumps with early stages of apartment ownership (transfer of management, cleaning out bad tenants, etc.)  We have decreased expenses and increased rents 3% already, so all on the up and up.

Thanks for the tip on the local meetup.  I will definitely plan on attending.  If anyone wants to circle back around syndication, I'd love to chat.  I still don't think my model is sound, and as I move into the next phase of getting bigger money, I would like to have a better understanding of what returns need to be, where to add the value, and why someone would go with me vs. another investor.

Anyone that wants to chat on that, please reach out directly and let's set up some time to talk on the phone.

Best,

Nik

@Neal Collins and @Michael Plaks - thanks so much!  

@Brian Schmelzlen one more question for you.  If the interest income from the seller note is treated as such, how do I treat the interest expense on the loan I'm still paying the bank from my original loan?  Is it the difference of interest payments that is deductible?  Thanks again for your help.

@Brian Schmelzlen thank you - I figured that may be the case, but wanted to make sure.  Thank you for your response.

@Neal Collins I'm the potential seller here.  A buyer approached me with the deal structure, and wasn't thinking of selling because I haven't finished turning the unit yet.  It would be a loss, but a cash flow scenario would be very nice for 10 years.

Thinking about tax implications first is a bit of the tail wagging the dog, but call me meticulous I guess.  

Thanks everyone for your help!

Nik

Hello, I've searched a few of the threads in here, but I haven't quite found anything to answer my question fully.  So, I'd like to propose a scenario here:

Property purchased for $1,000,000.  

$50,000 in depreciation taken over the course of the ownership.

$250,000 in capital expenses put into the building.

Sale price of $1,150,000, on a seller-financed note.  5% down, 5% interest rate over 10 years (10 year amortization, no balloon).

The seller finances $1,092,500 (95% of purchase price).

My questions are:

1)  Since the sale price (plus depreciation recapture) is less than the purchase price + capital improvements, it is treated as a capital loss, correct?

2)  The interest earned on the loan - is that treated as a capital gain, or is that treated as interest income?

3)  Is the first $50,000 in interest earned considered tax-free?  The sale price is $1,200,000 ($1.15M + $50k depreciation recapture), but the purchase price is $1m + $250k in cap expenses.  Therefore, can you count the interest earned against that $50k capital loss?

4)  Can you take the entire $50k capital loss in the year you sell, or does it have to be spread out as you receive the money from the seller note?

Thanks in advance.

One last thing - we are moving from San Francisco to Portland, OR.  We are not 100% happy with our CPA here, at least not happy enough with them to keep after we move.  Any recommendations for a good CPA in Portland?  We have 35 units now, after selling a bunch, but are actively buying more.

Thanks again everyone!

Nik

Thanks, Jeff.  Super helpful.  The other 80% is through the bank.  I paid 10% cash, the owner carried 10% (Which I paid interest-only on for a period of time), and the bank carried 80%.

The seller has no lien on the property, he paid off the balance with the 90% that was given to him between the bank's mortgage and my 10% down.  

I'll consult a RE attorney.  Thanks for your help!

Nik