Anyone out there ever structure a deal that undervalues park and overvalues POHs (assuming fully seller-financed). Seems like would be mutually beneficial for both parties but trying to weigh pros and cons. Seller will have a significant capital gain. Thoughts appreciated as always.
There are several issues here.
- Banks will finance only the land (park) portion although recently they seem to want to have the homes secured under the loan also. If a cash sale or owner financing this would be moot.
- The homes will have to be depreciated over 27.5 years whereas the roads, plumbing and other park assets can be depreciated over 15 years.
I can’t think of any advantage to what you propose. Perhaps you can explain why you think it would be “mutually beneficial.”
1 is not an issue - As I noted, homes would be fully seller-carry (separately haven’t come across any deals or conversations with banks that require homes as security and they would not in this case either)
Which I guess takes “several” down to 1…
2 is a bit trickier since it delves into a number of other variables that are not fixed from one investor to another (length of hold - fund term vs perpetual hold; POH strategy; etc)
But main goal here is to defer taxes, minimize day 1 tax hit to seller, and share savings in the form of reduced PP. I haven’t done any type of seller carry deal but my understanding is that cap gains are only paid on principal repayment portion going forward. Is that correct?
If goal is to minimize tax hit to seller (in exchange for lower price presumably), you might consider an “installment sale.” If you sell with the seller carrying the note as you proposed, capital gains are taxable for the year of sale (not on the principal repayment as received). In general, you need to purchase a percentage of the park each year and the accounting can get complicated for you (new depreciation schedule each year on the portion purchased).
Another way to minimize the initial tax hit for the seller is to have a lower purchase price and a higher interest rate, but that leaves you with lower depreciation. Depending upon your circumstances that may work out.
You might try to determine seller’s immediate need (down payment) and long term installment payment expectation. Then, you can determine the trade-offs that work out for both of you.