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I've been considering a rental property investment scenario that has been proposed and would like some advice and feedback from those who have much more experience than I do. Thanks very much!

  • Rental Property Appraised Value: $200k
  • Monthly Rent: $1200/mo
  • Mortgage: $67k ($700/mo)

Current owner is looking to sell equity in the property to raise cash. Investor offers $67k for 50% ownership in the property. Owner agrees to sell equity at a discount and would keep the current mortgage in place. Owner and Investor would split net rent proceeds ($1200 - $700 = $500) each receiving $250/month until the end of the lease. At the end of the lease, the property will be sold for fair market value (estimate $200k) and the Owner and Investor would split the proceeds, each receiving $100k. Owner would be responsible for paying off remaining mortgage.

In this scenario it looks like the Investor gets a good rate of return and the Owner gets access to needed cash without an expensive loan. Owner would also have the opportunity to benefit from potential appreciation.

A few questions:

  • How would the Owner show/record the 50% sale for tax purposes? Would it be a capital gain to be offset by the cost of the property?
  • How would the cost basis of the property be updated after the 50% sale
  • What's the best way to structure the partnership? Move the property into an LLC with the Owner and Investor being members? Add the Investor to the Deed and draft an agreement between the Owner and Investor? Would moving the property into a Land Trust be easier than an LLC?
  • Tax rules vary from country to country. Please edit and add a country tag. – Dheer Sep 5 '15 at 4:10
  • Are you the owner or the investor? – mhoran_psprep Sep 5 '15 at 10:44
  • I am the owner of the property – C T Sep 5 '15 at 11:47
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without an expensive loan

Lets assume the remaining lease is 1 year.

How much is that inexpensive loan going to cost you? You'll pay $250/month for a year (total $3000), and then another $100K. So you'll pay $103K for $67K loan. That's more than 55% APR, if my math is right.

How would the Owner show/record the 50% sale for tax purposes? Would it be a capital gain to be offset by the cost of the property?

You write a deed and record it in the county office.

How would the cost basis of the property be updated after the 50% sale

You'll have half the basis in the half of the remaining interest.

What's the best way to structure the partnership?

What partnership? You're talking about a sale. There's no partnership.

  • Can you run the APRs with a 2 and 3 year lease - these are more likely? The other option brought to the table is an investor loan @ 15% APR with a 4% origination fee for the $135k. – C T Sep 5 '15 at 4:45
  • @CT why not just sell now? – littleadv Sep 5 '15 at 5:45
  • @CT by the way, over the course of 3 years, 109K over 67K principle is still ~17% APR, so you'll be better off with the other option even for such a long period of lease. Unless value drops, in which case you'll pay less for the loan, but will end up under water on the mortgage – littleadv Sep 5 '15 at 5:47
  • There is a lease intact so the property needs to be sold to an investor who will honor the lease. Best investor offer so far has been $140k. – C T Sep 5 '15 at 10:39
  • Or you can buy out the lease... – keshlam Nov 4 '15 at 7:01

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