owner finance - helping seller on cap. gains

General Real Estate Investing
1

OK, in theory I have workable deal to buy the house I am renting w/seller financing if we can help seller on cap. taxes.

I am buying for $870k. I am getting a 1st for $470, seller is gifting back to me $70k to make improvements. And seller is carrying a 2nd at $400k that I make no payments on.

I will make improvements and sell in 18 months with seller and I splitting profits.

so, here is my tax question. can seller split the cap. gains tax with 470k
in 2007 and the other $400k+ in 2008 when I pay back the 2nd?

Also since this is investment prop. for seller, can they 1031 the 2007 gain and the 2008 gain? btw this was inherited prop. for seller so
their basis is very low --like $150k

thanks i appreciate feedback on how to help seller tax situation --and any other creative financing suggestions as seller is open!

2

First I have a couple of questions for you.

  1. Is the seller actually transferring the property title to you?
  2. Do you have any idea what the property will be worth after your improvements?

The debt service on your $470k mortgage will be about $3,000 per month P&I for 18 months. Plus you will have to pay closing costs on the loan of say $23k (5%). That is a total of about $77k out of your pocket during the holding period. Does the potential profit on final sale cover this and also offer an attractive gain?

If the seller actually sells you the house for $870k then they will have a gain of about $720k (870-150) which they will owe tax on in the year of disposition, 2007. There is no deferring the gain until 2008.

To qualify for 1031 tax free exhcange treatment the seller must follow very strict rules for identifying the replacement property and having a third party handle the funds received from this sale. Not enough info here to answer your question.

As an alternative perhaps the seller could transfer the property into an LLC which has two members, the seller and you. The LLC will own the property, you will continue to rent and improve the property then in 2008 the LLC will sell the property and the members will split the net gain in accorance with their ownership interests. I’m not a tax professional, just an idea.