100% finance plus, question. - Posted by Joe(IN)

Posted by Steve H. on March 13, 1999 at 07:09:25:


The IRS will receive the sales price of $40,000. The seller will have to claim the total sales price, because that is what will be reported to the IRS. As far as the difference between the sales price and LTV of 80% I assume that would be a note the buyer would give the seller. Correct me if the assumption is incorrect. At any rate the seller pays the difference in the sells contract price + any improvements and what he/she paid for the property initially. Keep in mind the IRS receives the total contract sales price at close (most lending institution sales) and it will keep that amount on file to compare to the sales price reported on the tax return. If you are ever audited the IRS will look at the contract price less other expenses mentioned. Am I missing any information here?

Let me know.

Steve H.

100% finance plus, question. - Posted by Joe(IN)

Posted by Joe(IN) on March 10, 1999 at 14:22:03:

I was talking to a mortgage broker today about financing my purchases based on the appraisal rather than the purchase price (without seasoning). My goal is to get the property and get some cash out at the same time.

He suggested I have my brother or my friend buy the house from the seller ($15000), and then I buy from him ($40000)with a new mortgage at 80% = $32000. Then I deed the property to our Corporation, and we share the cash or invest it in the Corp.

I’m not sure about this idea. Please comment.

Thank You!

Re: 100% finance plus, question. - Posted by Cesar

Posted by Cesar on March 10, 1999 at 19:01:53:

Here’s a question for you:

When your brother sells you the property at $40K, and buys it at $15K, there is a $25K difference, right?

Now, you finance it at 80%LTV, which gives you $32K.

So this difference between the $15K and the $32K, or $17K is your “profit”, right? WRONG!

According to the IRS, your brother just incurred a profit of $25,000, which he will have to answer to on his taxes as a capital gain. If you would even consider doing something like this, study the rules first, and do any real estate transaction as a corporation. Even then, it’s more of a tax question (and risky) than anything else.

Remember, it’s the SALE price that gets reported to the IRS, not your “profit”. Be very careful when you do these deals, or you will have an audit (plus “dealer” status) to contend with.

Re: 100% finance plus, question. - Posted by hk CA

Posted by hk CA on March 10, 1999 at 14:35:13:

At a quick glance, I’d have to ask if the property would appraise for $40k in its present condition. If so, why would the seller sell for only $15k? If the reason is that the property needs a lot of work, then the appraisal would be based on its present condition, not the fixed-up condition.

Maybe there are other circumstances involved, but on the surface, it doesn’t seem like it would work.

Hey Cesar … - Posted by KevinMiami

Posted by KevinMiami on March 11, 1999 at 01:55:38:

I am doing a flip (see details in post below titled “Flip advice needed please”) but plan to re-invest all/most of profit in an income producing property. Will this “tax audit & dealer status” problem also affect me?

Re: 100% finance plus, question. - Posted by Joe(IN)

Posted by Joe(IN) on March 10, 1999 at 15:59:51:

It will appraise, and I know the market.

I do not know all of the seller’s motivation because I bought through a realtor.

The house needs about $2500 work.


Re: Hey Cesar … - Posted by Cesar

Posted by Cesar on March 11, 1999 at 12:29:14:


Since I am not an accountant, I can’t give you a 100% response, but I do know that no matter what you do with the money AFTER you get it, you still have to explain HOW you got it. It’s this really funny thing about the IRS, they have a tendency to think you’re a drug dealer or something…

But any time you do a flip this way, someone has to be responsible for the sale price, no matter what amount you actually received. You may be able to set it up so you’re holding a second mortgage on it, which will get “paid off” at a discount months down the road, and that will take care of some of it. Otherwise, there are going to have to be some expenses to offset the profit.

Your best bet is to talk to a Real Estate accountant, and make sure he has some real estate…

hope it helps…

Re: Hey Cesar … - Posted by Steve H.

Posted by Steve H. on March 11, 1999 at 18:50:05:

I am a tax accountant, with real estate holdings. If the IRS considers you a ‘dealer’ you will not qualify for capital gains treatment on the sale. You have to claim the income from the sale as ordinary income. Which would be taxed at your rate, whatever it is. If you are doing these occasionally, then you are probably not a dealer. A dealer, as I know it, is someone who does these type of deals exclusively.

Hope this helps,

Steve H.

Re: Hey Cesar … - Posted by Cesar

Posted by Cesar on March 12, 1999 at 12:14:39:

Thanks, Steve, that does help a little.

Here is a question, though:

As far as the “income” that you are claiming, whether you are a dealer or not, that would be the difference between the price you paid to the seller and the SALE PRICE you sold it at to the buyer, isn’t that correct?

In this case, it would be his brother who would pay taxes on the DIFFERENCE between what he actually paid the seller and what he claimed the SALE PRICE to be on the 80% loan, right?

Now he needs to offset the “income” (the difference) so that he only pays taxes on what he actually received.

Does that make sense? If you have other suggestion, then please let me know, because I would be MORE than happy to listen!!! I have a deal just like this going through right now, and this is what I was told would happen…

Thanks for the input.