He owns the complex in a C-corporation? Otherwise I don’t see what accumulated earnings have to do with anything.
If he doesn’t have a c-corp, here’s what I might offer if taxes and shelter rentention are an issue: a 30+ year fixed-rate lease with an option to buy on the best owner-financing terms you can get. Have an understanding (written into the option if necessary) that you will not exercise until after he dies. When he does die, his heirs will get a step-up in basis to fair market value; then you exercise the option. Neither he nor they will pay any tax on capital gain or depreciation recapture (as I understand it). Sweet.
Accumulated Earnings Tax - Posted by Eddie Wetmore
Posted by Eddie Wetmore on August 28, 2003 at 09:23:13:
I have an older gentleman that has a 40 unit complex that I wish to buy in Hickory, NC. He bought it in 1981 for around 300k-he is nervous about seling because he “used” the apartment to shield some accumulated earnings, and now he is afraid that he can’t sell it. He is not entertaining offers at all because of this.
Is there some structure, maybe using owner financing, that I could use to preserve most of his tax “shelter”; (maybe even passing on some to his kids) that would be helpful in encouraging him to sell?
I feel that if we could find the right way to do it, he would part with the property for very little money, as he is probably only breaking even on the rents (40% vacancy).
I think that the whole place could be renovated, and get the vacancy down quite a bit, and the rents conversly up.
Posted by Brent_IL on September 17, 2003 at 20:07:51:
If the man is healthy, it is possible to do as I?ve done on occasion. Use a triple-net lease. Write an acceleration clause into the long term option that kicks in at his death. Have him apply for life insurance. You pay the premium. You would have to do legal gymnastics to make the payments deductible. When he dies, the insurance settlement that pays for the building is tax-free.
There are insurable interest issues and IRS recharacterization issues that should be discussed with a lawyer, not an insurance agent.
I used these to convince sellers that their spouse would have funds available if they died during the term of my requested owner financing, e.g., ?I?m 70 years old. I can?t do a 12 year balloon. I want cash now because if you default, my wife won?t know what to do with this building.?