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    Owner financing property at 0%?

    I need help as we are looking at buying family property and the seller is wanting to do owner financing at 0% inorder to keep the property in the family. Is this doable or does it create problems for the buyer or seller from a legal/IRS perspective? We would have a contract drawn up but don’t want unintended consequences down the road for either party.

    #2
    Originally posted by hillcountryhunter View Post
    I need help as we are looking at buying family property and the seller is wanting to do owner financing at 0% inorder to keep the property in the family. Is this doable or does it create problems for the buyer or seller from a legal/IRS perspective? We would have a contract drawn up but don’t want unintended consequences down the road for either party.
    Like your family is going to sell to you and finance at 0%?

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      #3
      Originally posted by Take Dead Aim View Post
      Like your family is going to sell to you and finance at 0%?
      That was the initial plan.

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        #4
        Should be no issue other than possibly an IRS issue but that would be semantics. I would have an attorney write everything up and everyone should be covered.

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          #5
          Just to keep a frisky auditor at bay I would draw up the contract to whatever interest rate equals to one dollar.

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            #6
            There is a stated minimum rate that can be charged and anything less than it is considered forgiven loan (income) to the borrower. Look it up. It's pretty low though - a lot lower than a bank would charge.

            They also can't sell you land for $1 to avoid inheritance tax. All kinds of rules on family to family transactions.

            This is not tax advice nor should it be taken as such.

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              #7
              Originally posted by BitBackShot View Post
              There is a stated minimum rate that can be charged and anything less than it is considered forgiven loan (income) to the borrower. Look it up. It's pretty low though - a lot lower than a bank would charge.

              They also can't sell you land for $1 to avoid inheritance tax. All kinds of rules on family to family transactions.

              This is not tax advice nor should it be taken as such.
              What he said. It is like 2.4% but dont take my word for it. As I said talk to an accountant and lawyer and everything should go smooth.

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                #8
                I would think there is nothing illegal on your end if someone in the family wants sell a piece of property at 0% interest- lending institutions charge interest to cover their costs for financing. If the other party doesn't report it as a capital gains I would think they can be in a bind with the IRS.

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                  #9
                  I owner financed some land I sold 40 years ago and.ended up with tax liability for the entire amount that year. Really hurt my income taxes. Maybe tax laws have changed, I dont know.

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                    #10
                    As stated, there is a minimum rate set by the IRS; I believe it's called the Applicable Federal Rate. Oh and this type of thing was developed to specifically deal with related party transactions, just like the one the OP described.

                    My advice is to consult with a CPA. More than likely, they will have you draw up a note agreement meeting the AFR requirements and give you advice on an outlet. For example, you could pay interest on the note, then have the other party gift the interest back to you.

                    I'm sure there are ways around it. However, ignoring it probably isn't the best option.

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                      #11
                      This may help.

                      The Internal Revenue Service, IRS, publishes a monthly update to the applicable federal rates, AFRs, and 7520 rates.

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                        #12
                        Couldn’t the selling price be adjusted to work out the same overall regardless of interest rate?

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                          #13
                          Originally posted by Pilgrim View Post
                          Couldn’t the selling price be adjusted to work out the same overall regardless of interest rate?
                          This is what I was going to say they get the same amount of cash and there is an interest rate on it for the books

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                            #14
                            Originally posted by Pilgrim View Post
                            Couldn’t the selling price be adjusted to work out the same overall regardless of interest rate?
                            My thoughts as well

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                              #15
                              Originally posted by Pilgrim View Post
                              Couldn’t the selling price be adjusted to work out the same overall regardless of interest rate?
                              The more I have read the more that this sounds like a viable option.

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