Lease Option Seller Wants 20-Year Term Due to Capital Gains Tax

General Real Estate Investing
1

I’m in San Diego and I have a possible lease option seller. They’ve owned the home for 40 years, so will have a large capital gains tax upon sale (the house is currently a rental). They want to do a lease option on a 20-25 year term because they say they are 68 and 71 years old and that’s what would make sense for them.

I’m not interested in such a long term, and I don’t think I’d be able to find a buyer who would be either. Are there any other creative solutions that I can offer them to lighten the tax implications?

2

If the property is in really good condition (minor repairs only), you may be able to do an agreement for sale (aka contract for deed) for the 20 year term and flip it to a landlord.

landlord would get a property without having to spend a ton of cash (instead of getting a loan for 500k, he can just give 20k down payment, but he still gets to keep the cash flow), seller gets to keep the property deed in his name until the end of the term, and you can pocket the spread on the down payment (say you give 10k to seller and ask for 20k down payment from buyer, for example)

hope that made sense…

3

The sellers are delirious.

There are ways to make money on this, but there are several moving parts that are so rare to see fit together, that I would just move on to something easier and more readily profitable.

That said, very simply you could secure a long term option with lower-than-retail rents (by offering to assume all maintenance, management and repairs for 20 years).

You sell your option interest via a 20-year CFD for the option price, plus 10%, with a payment that reflects at least a $250/mo spread for you.

You ask for 10% down on the resale CFD price. That leaves a balance which matches the option price you agreed to pay the original seller.

The seller assigns all his depreciation and tax benefits to YOU.
You assign those same benefits to your end/user buyer.

You make the CFD assumable, so that the seller can move without paying the off the CFD, and still get his equity back at time of sale. The CFD stays in effect for the new buyer.

You negotiate a significant option credit toward the purchase price, so that by the time the end/user pays off the loan balance, you’ll capture a sizable equity at the closing.

So, you make money on…

  1. The payment spread over 20 years.
  2. The down payment up front.
  3. The equity credit after 20 years.

Of course, after the sellers are dead, and you’re about five years away from your buyer paying off the CFD, you’re talking with the dead seller’s kids and happen to mention that you would be willing to pay off the balance of the money owed them, for 2 cents on the dollar asking if they would they be interested in an early pay off, or not.

Of course the ‘dead seller’s kids’ can’t wait to cash in, and they sweatily and nervously rub their hands together in anticipation of getting their money now, instead of waiting.

So, in the end, you get your cake, and eat it, too.

Sounds good to me.

4

Hi,

If the seller is currently living in this home and has lived in it 3 out of the last 5 years then they can sell it and anything less than $500k is tax free, in fact as retiree's they might be better off 1031 exchanging this home for a completely paid for home in a different location!

They really need to get with an accountant / tax advicer and look at there options!!

              GR
5

Ask the seller if they are willing to do an installment sale instead (owner financing)?

When he sells with owner financing, it’s reported as an installment sale and allows him to realize the gain over several years. Instead of paying taxes on the capital gains all in that first year, he pays a much smaller amount as he receives the income. This allows him to spread out the tax hit over many years.

Have him check with his accountant to figure his overall capital gains and the best term on the installment sale.

6

Thanks all for your assistance with this. I approached the seller with a contract for deed arrangement, but I don’t think there is a deal here unfortunately. But I came out of this much more knowledgeable than going in, thanks to your help!

7

It just occurred to me what would be a sweet deal here…

The sellers don’t want to pay taxes during their lifetime on this deal. Great. You make it possible that they don’t.

You actually give them a 20-25 year lease/option. The option price is today’s value, not tomorrow’s. You give them today’s rent, less management and maintenance costs, of which costs you agree to absorb.

What you’re dong is giving the seller ALL of their current NOI at a fixed rate for 20-25 years, and you take everything else.

What does this actually mean? It means that as the rents go up, you keep all the extra rents. As the retail values climb, you keep all the future equity.

Average values on a single family home (removing the Frank/Dodd real estate bubble) doubles every 10 years. So, in 20 years, this house is likely to be worth 2x’s what it is now. If not, so what? You’ve captured thousands in rent spreads for years and years.

Let’s say the market collapses in 10 years and the house is worth half what it is today. Again, so what? The rents won’t collapse like that. So you keep collecting your rent profits, and gamble that the house will be worth a little more than you optioned …in 25 years.

The upside for you on this deal could be HUGE, as long as you can lock in today’s rent and today’s retail value.

Now that I think about it, I would be interested in this deal, if you still didn’t think it was interesting or profitable enough.

We can split it! :biggrin

[b]P.S. What if we offered the seller 20% over retail in return for a locked in price and lease payment? Well… the rent still stays the same, doesn’t it? Yes.

So, we don’t care (really) what the price is, as long as we capture all the future rent increases.[/b]

8

These are the kinds of deals I live for, I just flipped one that was 70K underwater and needing a lot of repairs. It was for a 29 year term. I got $4500 and my bird dog got $2500. But yea if I had some guts I wud hold on to these and just sub lease them. But, Im a bit worried about vacancies and repairs etc. I can def see some long term advantages.