Creative Financing and capital gains.

I was taking to a guy a couple of months ago about a house. It was my first face to face and I really wasn’t ready for it. The owner had it for rent for about 20 year to one tenant and he was finally put into a old folks home. The home has been empty for about 8 months and has been for sale about that time. He was very distress about paying the capital gains taxes and was not willing take my lease purchase idea. This my new proposal and I wanted to run it buy you guys and gals.

Ok here it is, :deal The owner wants $90K and the comps come up to about $75k-$85. I was looking to offer $70K minus a $10k deposit and pay 40% flat interest only installment payments and a ballon payment at the end of 5 years. I would rent it out for $750 with a 5% yearly increase.

I was just wondering if anyone knew if this could help him with his capital gains tax problem and if it is legal to do this? The interest can be seen as income and the difference between the original bought price and the sale price would lower the capital gains tax. I heard something about if someone writes off losses in prior yearsthat it could effect the capital gains tax also.

So what you think?

You don’t know why the guy is selling yet, so you don’t know what to offer.

The seller will only pay taxes on the gain that he receives in a given year. That’s until 12/31/12. After that, ObamaCare taxes add nearly four percent to his taxable gain, and otherwise, robs him of hard-earned capital. Meantime, he’s paying regular income taxes on the money he gets over five year with your latest offer.

Frankly, there’s no reason to sell the house, if he wants to avoid paying capital gains. He could 1031 into something else that pays a dividend, but even then, he’s taxed on the money he receives, even if not the equity gain. And nothing he exchanges will pay as much as his rental would have in this market.

1031 always reduce the income of those who do exchanges, despite their capital gains burden being deferred.

The difference is the income stream is now managed by a 3rd party, and likely by some investment firm that specializes in triple net lease investing. I won’t go into all that here.

Back to the OPTION idea…

This is still an excellent solution for this guy, and I think you just don’t understand the full benefits. Let me help you…

  1. If the ‘rent’ were option money (consideration), the Optionor (seller) wouldn’t have to pay taxes on the money, until the option expired, or was exercised.

You could frame the option as an annuity. Seniors love annuities, and annuities naturally go ‘long, long time.’ So, you just promise not to exercise your option until after the seller is dead (said in a much more gracious manner, of course).

  1. Since the option, now treated like an annuity, goes until the seller’s death, you can still add an ‘option credit’ toward the purchase price with every consideration payment you make.

In fact, if you play around with the numbers, you could conceivably give the seller $120,000, with ‘enough’ monthly option credit towards the purchase price that the balance reaches $70,000 (or whatever) within a specific time-frame …all with the promise of not exercising the option, or canceling the annuity before the Optionor (seller) takes a dirt nap.

At the same time, the Optionor/Annuitant/Seller gets the whole amount ($120,000) due from you, without paying taxes while he’s alive.

If he’s trying to give his kids a nest-egg, you can arrange to pay his heirs after the annuity/option balance reaches $70,000, all after their dad’s six feet under. BTW, an annuity IS TAXABLE, so we don’t actually set up an annuity, we set up an option that ‘looks’ like an annuity.

So an option, 1) allows the Optionor (seller) to keep all the money he gets from the house without incurring an immediate tax liability. 2) It allows him also to defer capital gains. 3) It gives him a solid, reliable income for the rest of his life (which will be MORE than he’s getting now, or would get after a 1031 exchange, into some type of triple net lease arrangement.

Finally, if he’s attempting to qualify for government assistance, he has no choice, but to unload the house …and not show a sale within at least the last 24 months.

The question remains, “Can you buy at a price that makes financial sense to you?” Not to mention that the government is getting all that nosier about assets being sold off just prior to applying for Medicare and what-not. Just saying.

That’s all I got. Introduce the option idea again. However, let’s ask the seller what he’s trying to accomplish, so we can tailor our negotiations towards something that works, instead of making all sorts of blind offers and hoping something sticks.


The seller is not wanting to be a landlord any longer. He is looking for get out.

Let him ‘get out’ using an option that prevents him from being liable for capital gains during his lifetime; gives him a steady income; and otherwise delivers property to his heirs at a specific time.

Otherwise, he’s delirious about his cap. gain avoidance issue, and so without the option, or a sensible price, there’s nothing you can really do to help him.

Meantime, it’s not enough information to say, ‘he doesn’t want to be a landlord any longer.’ The option solves that problem. He’s not a landlord, he’s an Optionor.

It’s also not enough information to say, ‘he just wants to sell.’ “Everybody” wants to sell. So, that’s not helpful information.

How MUCH he wants to sell IS the answer we want.

From what little you’ve revealed here, the seller is evidently, NOT motivated enough (yet) to do an option, or pay taxes, or lower his price. So, it’s time for us to move on. This is otherwise called, “Bangng our head against a wall.” :banghead Move on, dude, before you wear yourself out.

[b]To recap:

  1. He doesn’t want to be a landlord…
  2. He’s willing to wait until Moses comes back, on his price…
  3. He doesn’t want to pay capital gains taxes…

He qualifies for the TRIFECTA of “forget it.”[/b]

I agree with you javipa, this is a trifecta of a mess. He wants the perfect world scenario in an uncertain environment where no one actually knows what taxes will look like going forward.

It is odd that he is not motivated to sell now to avoid more the potential of more taxes in 2013 which will happen it is a matter of how much higher are the rates.

If you have other deals going on I would focus on those and put this one on the back burner. It sounds to me like he can’t make a final decision on what he wants to accomplish with his property.

The house has been empty for 8 months. That means that he is not motivated. He may be distressed but that doesn’t translate into a sale necessarily. When you show up to meet with an owner that is truly motivated they want a sale TODAY. That 8 months with the house not rented nor sold also means that he has a problem in his decision making that he is drawing you into crazy town with him. Most problems making decisions stem from fuzzy facts. If the facts are fuzzy you can’t understand them enough to determine the black versus the white. Everything is grey. The answer that he doesn’t want to be a landlord anymore is not an answer. I always say that it is important what you call things. Landlording is not a thing Landlording is collecting rent, finding tenants, signing leases, having repairs done, etc. If he says he doesn’t want to be a landlord anymore, is he tired of collecting rent? I doubt that. What javipa said is probably true. He has some big expense looming and he wants to pass it on to you. Find out why he doesn’t want the house anymore.

Bluemoon, I agree with you that the seller is not motivated in any way. If you want your house sold you want it gone yesterday for more than it is worth. There is definitely more to the story and it would be wise to do your homework before investing more time, energy, and money into the work.

Speaking of unmotivated sellers… The lady who does our background checks at the sheriff’s dept wanted to sell the house she used to live in. She and her husband have been letting a family live there for free for the last few years. We offered her a very fair offer of 15k for it because it needed a good amount of work and would rent for about 600/mo. She wanted 20k and wouldn’t go a penny less. The family still lives there to this day free of charge. Sometimes you just have to move on.

That is a very odd situation Justin. They want to sell 33% more than what you’re offering but not charging their current tenants a penny? Something is not adding up. I agree that you should move on with this one.

The lady said the family living there was having a hard time so they let them stay there and didn’t charge them anything. I was kinda surprised we didn’t end up making a deal because she was a little upset walking thru the house. She hadn’t been in there for a little over a year and some things needed fixed and it was overall not in as good of shape as what she thought. She admitted that part and I thought that would drive her down to our price, but it didn’t. It’s a noble thing to help someone, but when you just write a blank check many people are going to keep using it until you decide it’s time to quit. I just wasn’t willing to pay more because of the location. It’s on a busy street and one block away from a park that’s been troubled by violence and robberies for several years.

The lady who does our background checks at the sheriff's dept

Hi Justin,

Hope things are well with you…

Sent you an email.


The lady who does our background checks at the sheriff's dept

Hi Justin,

sent you another email.


Well at least for the time being dividends and capital gains are only seeing increases if you earn more than 400K/450K. Otherwise they are staying at the current rate of 15%.


The lady who does our background checks at the sheriff's dept

Hi Justin,

sent you another email.