All Forum Posts by: Vin Soando

Providing an update on this as we ended purchasing a house with these circumstances are are considering doing it again and thought it might be helpful to share the experience and how the concerns I noted at the time were addressed.

Our scenario - Purchased a SFH in CA for significant price reduction with "free" rent to seller's brother for 3 years.

1. Tax issues - The rent free situation was not considered a gift and there was no reporting requirement according to our accountant.

2. As the property is a SFH (Single Family Home) it is exempt from the most restrictive rent control measures in place. We also noted a specific market rate rent in the lease and noted that it was waived for first 3 years. We also had a specific end clause to the lease at the end of the 3 year period so the tenant would be forced to relocate or renegotiate at the end of the lease.

Our tenant ended up passing away half way through the lease.  There are survivor benefits in CA so if our tenant had married or had an heir who wanted to reside in the property, that person could have taken over the lease.  This was not an issue for us fortunately but something to plan for.

The house is now in the process of being sold and we will do an exchange into another property. 

As there is no cashflow during this period this may not be an ideal scenario for everyone but we are all cash buyers building out a portfolio that will provide income to keep our current living standards once we retire from our day jobs in 5-10 years. 

Hi Julie,

We’re looking at a very similar situation with a house owned by an estate where one of the family members wants to remain in the house but at a significantly reduced rent rate. We’ve negotiated a 20% reduction on the asking price with a 3 year leaseback option at $0 rent.

My concerns and please share with the forum if you’ve researched the issue are:

1. Potential tax issues with the free rent. If the free rent were considered a gift or was taxable that could be a complication.

2. Tenant protection issues - We’re in CA and introduction of limits on rent increases so want to be sure that we have the lease structured so the tenant reverts to a market rate rent at the end of the 3 year period or moves out if unwilling to pay that rate.

I’m struggling with the 3 year lease being long, I don’t think I could enter an indefinite (til death) lease.

Another thought what if one spouse dies and the survivor remarries a younger person? Would that new spouse have the right to retain possession? This likely will vary by state.

I do agree with you there is some definite potential to this approach especially for buyers with high incomes (and high tax rates) and looking for post retirement income streams.

Appreciate the quick and clear responses.  Wish my accountant was a quick as you guys!

@Dave Foster I've noticed your use the term "net sales" in many posts I've read.  Is this equivalent to "gross proceeds" on a form 1099s? 

Per the IRS instructions for form 1099-s it notes that this will typically be the contract sales price and "should not be reduced by expenses paid by the transferor, such as sales commissions, deed preparation, advertising, and legal expenses."

Are there expenses that are considered valid reductions such as pest reports, property tax pro-rations, corrective work or repairs?

About to do our first 1031 exchange and trying to understand if there are any restrictions on financing when purchasing a replacement property above the relinquished property price.

Here is our scenario - Selling property at 350K with 210 in equity and 140K debt. Basically a 40:60 debt to equity ratio.

Do we need to maintain that debt to equity ratio when purchasing a replacement property above 350k?

For example, if purchasing a 700K replacement property could the 210K equity be used as a 30% down payment and finance 100% of the 490K balance?  Or would we need to maintain the 40:60 ratio and bring in 210K of cash resulting in 410k equity and a 280K mortgage?