How can we minimize the tax implications to a seller of a property in order to make the deal work for them?
To start, you can offer to pay the vendor less to save them taxes!
Presumably the vendor will not be keen on this idea, so you’ll need a little creativity. Sometimes, creativity will prevent deals from going through, based on our experience, so be prepared for this. But, in other cases, they are accepted. And it may be better for all involved.
I’ve summarized a few ideas here. Based on your specific situation, you will likely need much further explanation and details, and verification that they will work in your case. But this will get you thinking about some options.
- Vendor Take Back: A vendor take back (VTB) is a commonly used technique which can spread taxes over up to five years provided different conditions are met. Essentially, the purchaser pays the vendor over time.
- Shares vs. Property: Where the vendor has a property owned by a corporation, consider selling or buying shares of the company as compared to the property itself. This may save land transfer taxes and recapture of previously claimed capital cost allowance (depreciation), for example. There are various issues with this, but in some cases they can be satisfactorily resolved.
- Rollover: A more progressive and cooperative arrangement can be a tax deferred “rollover.” A simple example can include: where real estate is transferred to a corporation, on a tax-deferred basis in exchange for shares of the company. Or if already in a corporation, common shares can be exchanged for fixed value shares – allowing new common share ownership to gain future growth. Over time the shares can be redeemed, or bought, or simply left there to earn dividends. This strategy is frequently used in estate and succession planning, but also has other uses. Many variations on this theme are possible so you can achieve different objectives. This type of planning is certainly limited to a smaller group of investors, but when possible this planning can be incredibly helpful, where the vendor can accept payment over time, or participate to some degree in the future profits.
These are just a few of the tax saving ideas, of which you may use a combination. Just remember, don’t try this at home. Talk to a qualified real estate accountant and lawyer first.
George E. Dube, CPA, CA