Avoiding dealer tax consequence on Lonnie Deals - Posted by JP (FL)

Posted by JHyre in Ohio on February 16, 2002 at 08:33:25:

From a tax standpoint, good thinking. There is some chance that the whole thing will be reclassed as a sale, because the lease effectively amortizes the true purchase price. BUT it’s hard for the IRS to catch and you do have an argument that the first three years are a “true lease”. From a businsess standpoint, I proffer the following:

  1. Alot of the buyers I deal with would view the whole thing as rental…and trash the place and walk away. If you are dealing with “higher end” buyers, that may be less of a problem.

  2. I prefer to change title up-front to avoid liability…low end MH buyers are sue-happy.

  3. Alot of parks will not permit leasing of any sort.

Again, good tax planning. Business considerations make me less likely to use this structure, because I want my people to have a sense of ownership and full liability…so I use aggressive cash method of accounting to defer taxes. It’s a trade-off. But maybe you can have the best of both worlds with “higher class” buyers.

John Hyre

Avoiding dealer tax consequence on Lonnie Deals - Posted by JP (FL)

Posted by JP (FL) on February 16, 2002 at 07:23:54:

Instead of “selling” by taking a note, I use a lease option combination to get the same amount of money without creating a “sale”. Therefore, I don’t have the tax penalty of paying in the year of the sale at the time of the L/O.
Here’s how it works:

  1. I get option consideration ($1000) for the option to purchase (some people call it a downpayment).

  2. I get a 36 month lease for $300 a month ($10,800).

  3. I have a purchase agreement for $300 a month (zero interest) for 24 months ($7200), which is executed by exercising the “option” upon successful completion of the “lease”.

  4. In total I receive $19,000.

Now for the tax implication:

  • The first year; I have $1000 of income plus the monthly income in the year of the sale (ie $4600) minus expenses

  • years 2&3; I have $3600 per year minus expenses

  • years 4&5; “If” the option is excersised I would claim the $7200 minus the cost basis i.e. $5000 for gain from sale of $2200.

This is in contrast to a $14,000 gain (19,000 - 5000) in the year of the sale if I had taken a note for the entire sale without the lease.

Let me know if you know of any traps I may have missed.

Good Luck

JP