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I have a storage facility that my husband and I likely are going to be purchasing. The owners are my husband’s grandparents and they are willing to work with us to make a deal that makes sense for everyone.
This is the first time that I would be purchasing a property from a family member so wondering if there is a more tax efficient way of doing this deal than a straight sale?
They are also willing to finance the deal and likely for little to no interest. Wondering what the benefits would be to them, if any, on doing a zero interest loan for us.
Sorry for not having a ton of details here, this is the first non residential deal I’m doing so not entirely sure of what questions to ask.
Thanks in advance.
Hey Curt
What a great opportunity.
If Jamie’s grandparents sell to you for cash, they will owe a lot of capital gains taxes.. at least 20%!
But, if they sell to you with seller financing, it will be treated like an installment sale and they will only owe taxes on the money they receive each year. Which is still not an ideal situation for them.
It would be a good idea for them to consult with their CPA.
An alternative way this might could be structured, if they were in agreement, is for you and Jaime to get a master lease on the property with a Life Estate Deed — meaning that when they pass away, the deed would automatically transfer to you and Jaime – without probate. You could pay them a percentage of the proceeds from the leases you collect each month or a flat fee payment. You should get a reduced payment if you agree to do all the repairs, pay taxes and insurance. This way, they owe no capitals gains taxes. And when the property passes to you and Jaime later, there will be a step up in basis to the current market value. The other advantage of structuring it this way… because you have all the badges of ownership (even though you only have a master lease), you can actually do a 1031 tax free exchange later if you ever wanted to.
Here’s a good article about the pros and cons of a Deed for Life Estate:
Deed with Life Estate Understanding the Pros and Cons of This Handy Estate-planning Tool
Say HI to Jamie!
Let us know what you decide to do.
Best of Success
Jackie
Thanks Jackie,
I had thought about the master lease scenario but not with the life estate deed. That could be a great option.
A few more details:
They do have a purchase price in mind.
They would like some cash up front. We’re still in the process of figuring out how much that will be.
There has also been conversation of us continuing to pay the trust or whatever (they haven’t determined what exactly) upon their passing until the total amount has been paid.
Given that, do you have any further suggestions on how to structure that deal?
There’s also a LOT of land with this sale that hasn’t been developed yet. We’re thinking of adding more units and developing slowly but surely. Assuming that we do, if we ever wanted to get a commercial loan for the improvements, would we be able to under this scenario?
Thanks for the guidance!
Curt
With all that in mind, buying with seller financing is the best way to go. They will get the upfront cash they need. The title will be in your and Jamie’s company name or Trust, and you would be free to subdivide and develop the other land if you decide to do so.
They might prefer annual payments instead of monthly payments. Either way, it would be treated as an installment sale.
Let me know what you decide to do. What a great opportunity!
Hi Jackie,
Any particular reason you would go seller financing here instead now? If it’s a matter of waiting a bit of time for the bank to be able to finance expansion, we’re not opposed to waiting. It cash flows just fine as is.
Another new piece of info is they are fully willing to deed the property to Jamie’s Mom and then have her deed it to us if that makes more sense from a tax perspective. Would that make any difference?
I realize I should talk to a CPA for some of the tax related questions but my current CPA wasn’t very helpful with ideas so I’m in the market for a new one :).
Curt,
if they sell to Jaime’s Mom or to you, it will be a taxable event.
To avoid paying taxes, I suggested a master lease with a deed for a life estate. They would have no taxes and you would get a step up in basis when the property passes to you with the life estate.
But when you said you might want to get financing to develop some of the additional land, that made me change strategies to seller financing (even though they would have to pay taxes. You would not be able to get financing unless it was titled in your or Jaime’s name or your company. But, if it is a plan for way down the road, the life estate may still be the best way to go.
The ideal situation is to always avoid paying taxes when ever possible. My 2 cents.
Now we’re getting somewhere!
Here are the numbers that they would like. We haven’t discussed monthly payments yet. Still up for debate.
Purchase price is 150K. There are only 48 units currently but lots of land as mentioned.
They are going to want some money up front, probably around 15K.They ultimately would like the full 150K paid to their heirs. Assuming they pass before 150K is paid off, is it possible to continue to pay the heirs until the 150K is completely paid off?
I think that is the desired scenario. If we can’t accomplish that, probably the seller financing deal but I’m sure everyone here would love to avoid paying the taxes as well 🙂
Sounds like the ideal situation is to master lease with an annual payment of $15,000 to start and the deed for life estate.
The life estate could be structured so you get the Deed when they pass but you still owe $ to the heirs – but the note will not start until later.
You might explain that if heirs get a lump sum of cash they tend to blow the $ but if they get monthly or annual payments, then it will be a gift they keep on giving long after they are gone.If you decide you want to develop the land later, it could surveyed off from the other property later and treated as a separate transaction.
It would be a good idea to get a CPA and/or an elder attorney involved (assuming you can find one that knows what they are doing)
Let us know how you decide to structure th
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