Steve D. Valentine shows how property owners can use seller financing to generate income without triggering capital gains taxes. A woman in her 70s with seven free-and-clear homes worth $400k each can defer taxes by carrying the loan herself, collecting 6% interest instead of selling outright and paying roughly $32k in depreciation recapture per property.
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I have got a strategy that is going to blow your mind on this episode. Hey, I'm Steve D. Valentine, and we're talking about seller financing, which is when you own something free and clear. How can you continue making money on that without owning the property? Well, recently I met with a client and I showed her some things that she didn't realize. And they're very, very tricky when it comes down to looking at your future and understanding the tax benefits that come along, this type of strategy. So let me set the stage for you. This lady is in her 70s. She has seven homes that she owns free and clear. Some of them she's owned for 16 years, all the way up to seven years. Okay. One of the things that she told me is, hey, I just want to sell the entire portfolio, cash out, pay my taxes and put your money where. This is where I get into kind of helping you guide through, like, what's next. So when she told me she wanted to sell all this, we started going through the numbers on things. And this is really what I want to show you is if she sells those properties. And I'm just going to do some average numbers here, okay? So these are not going to be perfect numbers because they're off the cuff. But I want you to really see it. Let's say one house she kept for 16 years, she depreciated that every year. Okay? She paid $100,000 for it 16 years ago. She's depreciated at $2,000 a year over 16 years, $32,000 worth of depreciation that she took off. Okay? Now she is going to have to recapture that $32,000 in depreciation, right? She's going to have to pay taxes on what she depreciated, not that she owes $32,000. So this is where it's really important to have a CPA that really understands and having this conversation with the CPA before you pull the trigger on selling something so that you truly know your tax ramification. So $100,000 is what she paid for it. It's worth $400,000 today. Okay? That means there's a $300,000 spread in between. And again, simple numbers. Okay? $300,000 just on her capital gains, which is 20% long term cap gains tax. She's going to pay $60,000 in taxes on that $300,000 profit. Okay? Now she could 1031 exchange that, but she wants out of the rental game. So she's done. She just wants to cash out. So not only is she going to pay the capital gains, the $60,000. She also has to recapture that 16 years of depreciation and pay taxes on what she depreciated. Right. Which could be another 20 or $30,000 she owes in taxes. So again, easy numbers. Looking for a lender that is going to help you structure your strategies just the way I do in my business. Well, I want to introduce you to Andrew Karam, a sponsor of this podcast. He is with Edge Home Finance. He is a broker and he is a lender strategist, just like I'm a real estate. And he's going to help you get through all the what ifs and how to's by breaking it down and really showing you a great way in the home loan process or in the investment side of the process. So reach out to Andrew. His contact information is in the show notes. And thank you for our sponsors this week. And back to the show. Let's say she owes $100,000 in taxes. Okay, so she sells the house for 400,000. She pays roughly a 10% cost of sale, so $40,000 for real estate agents closing costs, buyers closing costs, if there's that contribution. So now she's down to 360, then she's paying on that debt, right? So from 100 to 360, which is her net 260,000. Now she's going to pay tax on that plus the depreciation. So technically, if she sells that house that way she's going to have at least $100,000 in tax liability. Let's say that all seven homes are the exact same. She is going to divvy out $700,000 of her retirement to all these costs in taxes. But what if she didn't have to? Okay, here's where the trick comes into play, which is actually a very, very amazing strategy if you own rental properties free and clear and you want to create and continue some income. Okay, so when I asked her what she was going to do with her money when she sold it, she's just going to put her money in a 4% money market. Like that was going to be her rate of return on whatever her thing is, right? So if we take all those homes, it's like 14, about $1.4 million. So let's just say $200,000 a house, $1.4 million. Now that $1.4 million at 4%, that's providing her $4,600 a month in income that will also be taxed, but it's passive income, not earned income. So that's what she's going to make. $4,600 annual income of $56,000. What if I told you the $700,000 she paid in fees and taxes could still be working without paying capital gains tax. What if I could add another $700,000 to her retirement, creating extra $30,000 a year of annual income and she still didn't pay the taxes? This is what this looks like. So here's the power of seller carry. Let's say she sold all seven of those homes to me at $350,000 per home and I agreed to pay her a 6% interest rate. This is what it looks like. She would be creating $147,000 in interest only income, not paying any capital gains tax. Right now she's kicking that can down the road. She's not paying a bunch of fees and she's not paying a bunch of taxes. So essentially by leaving that money in on seller carry, she's kicking the taxes down the road. But she's creating some pretty substantial secured guaranteed income by being the bank. So a seller carry is where she becomes the bank. And she's going to have a note and deed of trust that secures her against the property. And I'm now the buyer. So technically she kind of still owns the property without all the ramifications that come with, you know, repairs, tenants, all those other things. What I just did for her was create almost double, actually triple her annual income by selling those homes on seller carry. And she has kicked the tax can down the road. And while the taxes are still sitting in the properties, she's collecting interest off what she would have paid. Irs. Pretty incredible strategy when it really, when you see the power of the numbers and what it looks like, because here is the one rule at the end of it, when you do seller financing on something, you are only paying capital gains tax on a percentage of the principal you receive in any given year. I believe that number is 20 or 25%. So if I paid 25% of the principal off on the property, she would have to pay capital gains tax on that 25% that I paid in. So you can actually play this strategy for a long period of time of paying a little bit of taxes, collecting a little bit of principal over time. But here's what it does. You got to remember those taxes are all sitting in that property. Creating 6% interest on $700,000 that she would have paid out is now creating a massive amount of income on the money she would have paid in taxes. Yes, the taxes are still due, they're just down the road and we're going to make them work inside the property. So if you own a property free and clear, maybe you're done renting it rather than sell it. We need to have the conversation of what that strategy looks like. Even if it's a massive portfolio. What if it's 50 homes? If you're not thinking about 1031, exchanging it into something else. This is a great way to continue owning property without owning it and creating a great secured, guaranteed rate of income, interest income on those properties without having to mess with the tenants, repairs and all those other things because you've passed that liability off to somebody else. So if you were looking for a strategy like this and you own a home free and clear and you want to talk about this stevedvalentine.com or DM me whatever it is through Instagram, I sell whatever. And let's have the conversation about what your strategy looks like and how I can help you guide you in creating more income safely and securely through real estate by doing the seller financing strategy. I will see you guys on the next episode.
