Property Tax on a Seller Financed Deal
Hi all- I’m in a unique / fortunate situation where I’ve found some older homeowners looking to remove the burden of managing a rental property that are willing to seller finance their property to me at $0 down and 1% interest on a 30-year note, no balloon.
To get this, I’m paying them about 10% over asking price in total purchase consideration, but the terms and monthly payments are so favorable that it really doesn’t make much of a difference.
Although I’ve read extensively about these deals, this would be my first and my big question is around the taxable basis of the property. Does the basis remain in place since the seller would presumably hold the title until the payments are complete? Or does it step up to the purchase price number that I put on paper?
Additionally, if anyone knows good title / escrow folks and RE attorneys in LA county that could help me with this deal, that’d be fantastic!
@Michael Caldwell, definitely consult with an RE attorney. I can recommend one to you; she helped a client of mine buy a home that was financed by the buyer's dad. This is similar, except the financing is coming from the seller.
But from my understanding:
You'll still be taking title to the property. The sellers will take a mortgage on the property. So you'll own it, and they'll be acting just like a lender. If you don't make your monthly payments, they can pursue a foreclosure and take the property back.
It's a sale -- albeit one that's financed 100% by a non-traditional lender. So you tax basis will step up to the sale price.
Good luck! And congrats on what sounds like an amazing find!
All the best,
Jon
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Quote from @Michael Caldwell:The seller may be offering to sell the property on a contract for deed, rather than a transfer of deed. A contract for deed doesn’t transfer legal title, it’s a contract that states title WILL BE transferred when the loan is paid off, or a specific amount of equity is accumulated in the property. You receive an “equitable” interest in the property, not a legal interest.
Hi all- I’m in a unique / fortunate situation where I’ve found some older homeowners looking to remove the burden of managing a rental property that are willing to seller finance their property to me at $0 down and 1% interest on a 30-year note, no balloon.
To get this, I’m paying them about 10% over asking price in total purchase consideration, but the terms and monthly payments are so favorable that it really doesn’t make much of a difference.
Although I’ve read extensively about these deals, this would be my first and my big question is around the taxable basis of the property. Does the basis remain in place since the seller would presumably hold the title until the payments are complete? Or does it step up to the purchase price number that I put on paper?
Additionally, if anyone knows good title / escrow folks and RE attorneys in LA county that could help me with this deal, that’d be fantastic!
As for the 1% interest rate - the IRS has an Applicable Federal Rate which needs to be used for Federal Tax purposed. Depending on the way the note is structured, it’s currently between 4.5 - 6%. So the tax consequences may be different than what’s perceived. While you will have more of an interest expense write off, your basis in the property will be reduced. CPA required.
Try to purchase with full transfer of deed; but if the deal is too good to pass up then the CD could work for you.
Thank you for this helpful insight! My ultimate question is if, in a contract for deed sale, the property tax steps up. Does it? Or does that not happen until full transfer of title? And at what point does that transfer of title happen?
@Michael Caldwell
I think the type of transaction is more important than potential tax consequences.
I personally don’t like installment sale contracts or contracts for deeds, especially over long periods of time.
Let’s say you have to make 100 payments in order to “buy” the property and you miss payment 98. What happens? Do you lose the benefit of the first 97 payment? For this reason many states will treat installment sales contracts as mortgages and require a foreclosure process.
In any event, push to take title immediately and the terms of the seller financing sound like a home run.