Installment Sales and Dealer Status (again) - Posted by Stacy (AZ)

Posted by JPiper on April 04, 2000 at 21:11:06:


Sounds like you understand the concept. Can?t explain ?why??.except to say that the IRS views the house as inventory?.and therefore upon sale the profit is taxed, whether you decided to collect it over time or upfront.

Your question reminds me of the old story about the guy who?s arm hurts when he moves it around. He carefully explains this to the doctor saying ?Doc, my arm hurts when I go like this?. The Doctor says, ?Then don?t go like this.?

If you don?t like paying the tax on a contract for deed sale, then don?t sell them that way. An alternative as an example is to lease/option the property. As an example, you could do a 2 year lease/option instead of a land contract with a 2 year balloon. You could arrange the payments so that they approximate that of the contract. You could credit the tenant for timely payments. And two years later when you sell (if the tenant exercises), you could do a 1031 exchange with the proceeds thereby deferring your tax.

Further, as you know, contract for deed could be more difficult to get back in the event of a default than the lease/option?.depends on state law of course.

Some people say that you can get more down with a contract?.and I won?t necessarily argue this. However, a two year lease/option should get more upfront than a one year in my opinion. And when you look at it after tax?.I?m not so sure there?s a disadvantage there.

As to having your corporation sell the note to another corporation?.. there may be ways to do this, but keep in mind that self-dealing is always an issue. And further, if you buy a discounted note, the discount has to be amortized (whether you receive it or not) and taxes paid annually.


Installment Sales and Dealer Status (again) - Posted by Stacy (AZ)

Posted by Stacy (AZ) on April 04, 2000 at 17:04:36:

I’ve searched the archives and haven’t found an answer for this particular question.

If I buy, say, ten houses this year with new financing, then wrap them and sell on land contract at a higher sales price and interest rate (2 year balloon), I am a dealer by definition. I’ve bought several properties with the intent of selling them. But because of this I now owe taxes on all the profits, instead of being able to pay taxes only on the installments received that year.

Am I correct so far?

So, what can I do to lessen the tax burden? I read something about having a main corp sell the wraps to LLCs at a discount, but that didn’t make sense to me. Any ideas?

I don’t really understand why dealers are forced to pay taxes on the entire profit. Seems the IRS must have a good reason, but I don’t know what it could be.


Re: Installment Sales and Dealer Status (again) - Posted by Troy M

Posted by Troy M on April 05, 2000 at 07:58:35:

Hi Stacy,

Something else to think about: I recently had my attorney draw up a Contract for Deed for my use (I was selling). He asked me if I would be doing more than 4 per year, because if I do, I will be subject to the “Truth-in-Lending” law and will need to get an additional disclosure signed. You’ve probably seen this disclosure before, I believe it’s the same one you sign anytime you get a bank or mortgage loan.

Troy M