That is a good point, and that is why I said “Assuming no special circumstances, … .” I would consider that to be a special circumstance. The fact that the property was free and clear makes me think that this seller is a long-term hold rental operator. If that be so, this is not a dealer property, even if the seller should be labeled a dealer. He may not be a long-term holder, as there are other explanations for why the property might be free and clear.
Posted by Mark (OR) on January 01, 2003 at 12:54:49:
I’m making an offer on a House + 4 Plex. The seller is retired, so I mentioned to the Real Estate Agent, that my offer was going to be for owner carry.
The agent said the seller would still have to pay his capital gains taxes upfront? I told him I thought he would have to pay taxes on his monthly income from my payments, but could defer his larger tax liability, to when the contract was paid in full - (a 7 yr. balloon would be part of the offer).
Who is correct? THANKS!
Assuming no special circumstances, you are. I hope you gently suggest to the real estate person to either: never give advice on taxes or else to study up on the topic. I recommend the book “Aggressive Tax Avoidance for Real Estate Investors” by John T. Reed, found at his www.johntreed.com website. You might mention that book to the real estate agent. You might even consider buying a copy as a gift for the agent after you buy the property.
Then the Seller could Lease with an Option, and delay the payment of capital gains taxes on any sale, including the Option Deposit, which is not taxable until the Option is exercised or expires. Of course the monthly payments, less any deductible expenses would be taxable, but who would have a problem with that…?
I realize that this Questioner is asking from the Buyer side of things, but the L/O would do the trick for the Sellers tax problem, assuming Dealer status is an issue or concern.
