How can I help the seller avoid capital gains tax? - Posted by Ben F.

Posted by JHyre in Ohio on July 22, 2002 at 06:05:27:

Leasing from with an option to buy defers the sale and taxation of the sale until the option is exercised…you can negotiate when that occurs. Another option is 1031…in his case, he would roll the proceeds into some triple-net or other property that requires little management, defering his gain indefinitely. If he sold to you on a note, he’s probably be eligible for installment sales treatment, that is, the taxes would be due as you made the payment (not much of a deferral). A more comoicated approach is to drop the properties in an LLC (or more than one) and you become a member and part owner in exchange for making the properties profitble again…you’d have to own a “profits interest” in the LLC(s) to defer your portion of the taxes.

John Hyre

How can I help the seller avoid capital gains tax? - Posted by Ben F.

Posted by Ben F. on July 22, 2002 at 01:58:01:

I hope someone smarter than I am can answer this one!

I’m dealing with a nice older gentleman with several properties that he has held since the sixties. He would like to avoid problems with the tenants in his occupied properties, but many of his properties sit empty. Some of these buildings are over 100 years old.

His main concern is the capital gains taxes he’d be hit with since he bought the building for about $10k each, and they’re now worth about $150k each.

He doesn’t need to sell but is motivated by the desire see the builings fixed up, and as I said, he’s tired of dealing with tenants.

I have cash to use if necessary. I’d like to rehab and re-sell the abandonded buildings as SFHs or rent them to University students. I’d simply rehab the occupied buildings as much as possible.

How do I get control of properties without triggering a massive Capial gains hit for the owner? Long term lease purchase? Land contract? Wrap around mortgage?

Surely there is a technique I’m missing.

Any help would be greatly appreciated.

Bennett Farrell
Newbie CS student

Re: How can I help the seller avoid - Posted by Nate(DC)

Posted by Nate(DC) on July 22, 2002 at 16:53:02:

I believe Frank Chin posted a story on the message board one time about an investor he knew who approached owners with properties in this situation and offered to do a long term (30 year?) triple net lease at below market rent.

Let’s say the market rent for a property was $500. This investor would pay the owner $50/mo for a 30 year lease on the property. The owner at least got something from a property that would otherwise have sat vacant, and the investor got a $450/mo rent spread which was cash in his pocket.

What ultimately ended up happening was that, since this owner was an older person, they died well before the 30 year lease was up. The estate found that they could not sell the properties to a conventional buyer due to the fact that they were encumbered by a long-term below-market lease. So what ended up happening was that the investor either got paid a nice fee to let them buy out his lease, or HE got to purchase the building for below market value since no one else would buy it.

It sounded like a very interesting strategy. I bet if you search the archives you could find where Frank relates the entire story.