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Gains Tax Benefits For Seller Financed Notes?

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I am preparing to make an offer on a home. I would like the owner to carry back the entire note. This particular home was gifted as part of an estate approx. three years ago. The home is free and clear, vacant, formally a rental, out of town owners. What tax benefits do the sellers have, if any, by taking back the note. If there are benefits, I want to enlighten the sellers and use these benefits as currency. Thanks, Constantine.

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Constantine,

 

When selling an investment property results in a capital gain, you pay the capital gains taxes on the sale in the year you receive your profit. Using an installment sale does not save you any taxes, just spreads out the tax liability over the term of your seller carried note.

 

On the downside, all of the depreciation allowed is recaptured in the year of the sale and taxed in full immediately, even if you have not received the cash to pay the depreciation recapture taxes. Additionally, you are receiving interest on your seller carried note. The interest is ordinary income to you and taxed accordingly.

 

A 1031 exchange would really be in the seller's best interest but a seller held note for the purchase price is not like-kind property and takes a 1031 exchange out of the picture.

 

I guess you are assuming that the seller really will have a taxable capital gain. You say the seller received the property as a gift as part of an estate. Does this really mean that he inherited? What is his cost basis and how much higher is your purchase price? Is there really a taxable capital gain for the seller?

 

You are not a tax professional, so don't give the seller tax advice. You are not well enough informed anyway. In this case, there are no tax benefits for the seller (in the form of tax savings) to be gained from your strategy. When there is a taxable capital gain, the best tax strategy for the seller -- a 1031 exchange -- does not permit seller financing.

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Dave,

 

Thanks for the information. I am a fireman not a taxman, thus, no advice will be given by me. FYI I ended up making a cash offer today.

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