Being Creative with Capital Gains... - Posted by Ryan

Posted by phil fernandez on March 17, 2005 at 18:31:09:


Being Creative with Capital Gains… - Posted by Ryan

Posted by Ryan on March 16, 2005 at 16:34:40:

Veteran investors, I need some ideas and a few questions answered…

First of all, I’ve run the numbers and the deal makes sense from a cash flow perspective. But this has nothing to do with my question and I will leave it out. I’m looking for creative ideas on how to structure the deal.

I have come across a package deal that a guy has owned for some time. He owes very little on the mortgage, has depreciated it over the years and has a significant capital gains tax due on the sale. Other investors have put an offer in on this deal, but the seller has said no because of the capital gains bill. He is now thinking about not selling.

I made a comment to the realtor (yes realtor) that I could give him cash up front, with the remainder due in a balloon payment in 5 years. I have the seller listening, and may consider selling under these terms. Basically the seller will sell if there is a way to minimize the capital gains. Maybe defer them indefinitely?

OK, my questions deal with being creative with an offer that would allow the seller to pay the minimum capital gains possible. Any creative ideas on this? Note that a 1031 is not an option, because the guy is 75 years old and wants out of investing. He is not interested in willing it to the children.

Here are some thoughts I’ve had…

1). Some type of cash, maybe 60% down, with a balloon payment in 5-7 years. This manages to defer the capital gains (I think?? Unless the tax is due on sale, regardless of the financing arrangement?), but does nothing about the bill.

2). Some type of lease with 5 year option. I would present this as a way to cover the capital gains (save my payments for 5 years), and I would take care of maintanence and management. He is out of the investment world, and I will be able to cash him out within 5 years.

3). Have the guy refinance the properties, take the cash and I take over the loan. He would have his cash and since it’s a loan not owe any capital gains. But since title would transfer the taxes would come due???

thanks in advance for any ideas…

What does he do with his proceeds? - Posted by DaveD (WI)

Posted by DaveD (WI) on March 17, 2005 at 09:42:46:

It’s always a laugh when folks say they can’t afford to sell or won’t sell because of the tax on the gain. Price paid for sucessful playing the investment game. Sounds like he isn’t so much worried about money, he just can’t stand the thought of paying the taxes.

Assuming he cashed out, what would he do with his proceeds after taking the gains hit? If he is just going to stuff it into T-bills then the installment sale makes perfect sense. It spreads the gain out for as far as the IRS rules allow it to be spread out. Idea being he will be taxed in little chunks on each years “gain” instead of the whole kahuna at once. It reduces the amount of, and slows down the payment of the taxes. Just a whole lot mentally easier to stomach. Kinda like getting nibbled to death by ducks instead of being eaten by an alligator.

What’s cool for you is you get in with very little down, and have a lot of flexibility in how you construct your repayment terms.

I like Phil’s idea - Posted by ken in sc

Posted by ken in sc on March 17, 2005 at 09:14:59:

Lease with option. If the sale price is say 100,000 (to make the numbers easy), you could offer him a lease which would be equal to interest at 5%, or $5000 per year which is 416/mo. This would make great cash flow for you, and all interest, not capitol gains for the seller. Set the option price at a little below todays market value. You will get the benefit of the appreciation when you buy. Write the agreement as “Mr. Seller, heirs or assigns”. Write in it that the option is to be due within one year of his death. His heirs will get a stepped up basis and pay no tax at the sale. He will get interest payments for the remainder of hois life. He will never pay capitol gains.


Re: Being Creative with Capital Gains… - Posted by phil fernandez

Posted by phil fernandez on March 16, 2005 at 18:44:52:

Well on #3 you’ve answered your own question. Sure your seller could refinance and take out cash and it wouldn’t be taxable, however once he transfers the property a sale has occured and that would trigger a taxable event.

I’d give him minimal cashdown and then spread out his gain for as long as possible. Heck is he dies he’s kids will get a nice income stream.

Now you could do some kind of a lease option with the option to be excercised at the time of his death so the heirs get the property at the market value upon death. Problem that I see with this is you don’t know when your seller is going to die and I’d think that a contract would have to have specific dates in it.

Re: Being Creative with Capital Gains… - Posted by Randy (SD)

Posted by Randy (SD) on March 16, 2005 at 17:44:31:

First let me say you should avoid providing “tax information” to your seller, suggest he review the tax implication with his accountant or CPA but you might recommend a installment sale. Basically a seller financing contract it’s a somewhat complicated formula used by the IRS to determine the percentage of the payment allocated towards capital gains, but here’s a link:

just be careful… - Posted by Barry (FL)

Posted by Barry (FL) on March 17, 2005 at 10:54:35:

of the timing as, I believe, the IRS considers anything more than a 3 year lease a disguised sale.

Please note, I am not an accountant nor to I play one on message boards.

Hope This Helps,
Barry (FL)

another great post! - Posted by Natalie-VA

Posted by Natalie-VA on March 16, 2005 at 18:52:27:


I just wanted to take a minute to acknowledge your great posts. You give good advice in a concise format and often give the poster a location to find more info.

Thanks for taking the time to help make this board a success!