Suggestions Please.

flyboy profile photo

I looked at piece of property today and am trying to decide how to structure an offer and the tax consequences I may face.



Currently the house on the property is very cute and in nice shape 2 bedroom/2 bath home on 21 acres.



Asking price @ $600,000



I’m really not all that interested in the house, but I do like the possibility (and it can be done) to separate off four lots. In fact, one lot is currently in front of the town and approval, I’m told, should be granted by February 06.



The single lot, and each additional three can be sold for a minimum of $125,000 each. The remaining three lots would need to be engineered some more, but the perks and deeps have been done to satisfaction.



My question…….



If I purchase the whole shebang, and then sell off the house for say, $275,000 within a few month’s, as well as the lot currently in the approval stages for $125,000 for a gross of $400,000 obviously there are no cap gains because I’m selling under the two year rule and for less than the purchase price of $600,000…how is this treated? I’m pulling a blank here. I’ll still have three lots worth say $125K each for a gross of $375K(to be sold down the road).



I would like to structure it so that I do not need to take title to the house, and can have a simultaneous sale of the home to someone and the remaining property to me at the same time.



The property is 70 miles north of NYC and directly across the street from a 52 acre state park. Nice setting.



I can pay cash and am told the owner will hold a note. The owner has moved to Tennessee and the home is vacant and has been for awhile already. I assume he is a motivated seller since he has reduced his price from the original tag of $750K



One last point. My math shows the unimproved lots would be around $60K which is on the high side for unimproved land here.



TIA to all who offer words of wisdom.



[ Edited by flyboy on Date 12/01/2005 ]

Comments(7)

  • woodsong1st December, 2005

    Since you are subdiviing and selling at different times and a portion of the property would be sold prior to the 1 year requirement to pay long term vs. short term capital gains, i encourage you to speak to a real estate tax atty ASAP to get their professional advice for your state. Note that the "no capital gains taxes if owned for 2 years" only applies to owner occupied structures...not investment properties. at best, you wait and sell after 12 months of ownership to only pay long term instead of short term gains.

  • DrBeFree3rd December, 2005

    Flyboy,
    Why not lease the entire thing with option to buy from this very motivated seller? You can then option out the house part to your 1.) lease option tenants or 2.) sell it to a buyer.
    Leasing it will give you some time to spread out your tax gains and a simultaneous close will avoid you taking title.
    You could also take it sub 2 if the seller is willing. This will give you the title but keep the loan risk with the seller.

  • flyboy4th December, 2005

    Good advise from the both of you thanks.

    After running the numbers, this property is way over priced. I may toss out a low ball (at least much lower than asking) just to see how motivated the seller really is.

    Since he has already vacated to Tenn and the property is sitting vacant, maybe a low-ball number is not out of the question?

  • DrBeFree5th December, 2005

    Be sure and tap into his desire to dump this property before you get to the price negotiation. Then get his price down and try getting a long term option. Say 10 years or even more.
    Remember, you dont have-to buy this. If he seems stuck and doesnt mind just holding it, move on. Your time is better spent negotiating on another deal. Leave your name/number and thank him for talking. Call him in 2-3 months when he is tired of seeing the bills still rolling in on an empty property.
    -DrBeFree

  • woodsong5th December, 2005

    Quote:
    On 2005-12-05 01:45, DrBeFree wrote:
    Be sure and tap into his desire to dump this property before you get to the price negotiation. Then get his price down and try getting a long term option. Say 10 years or even more.
    Remember, you dont have-to buy this. If he seems stuck and doesnt mind just holding it, move on. Your time is better spent negotiating on another deal. Leave your name/number and thank him for talking. Call him in 2-3 months when he is tired of seeing the bills still rolling in on an empty property.
    -DrBeFree


    have you ever actually found a property owner crazy/dumb enough to sign a 10 year option?? The sales price would have to be so overly inflated above current FMV to justify someone doing that- there would be almost no point to it. If you have found someone in the past to allow a 10 year option than more power to you!![ Edited by woodsong on Date 12/05/2005 ]

  • kimander16th December, 2005

    Are you buying a business?
    Have you determined the cap rate?

  • MCNichols16th December, 2005

    Yes - buying a business (i.e. cash flow).
    Cap rate = 11.56 or higher depending on purchase price.

    No suggestions otherwise?

    Mary

Add Comment

Login To Comment