Steve,
Invest NW meets the first monday of every month at Izzy’s pizza @ Ne 102nd and Ne Halsey usually a speaker and good comraderie.
In L/O’s we call investment because of “intent” Our intention is to hold for investment purposes. The irs as explained by the accountant (he’s the best if you need one) “intent” is the key ingredient to make the determination.
You are welcome to call me 503-668-0406 for directions to Invest nw are any other purpose
Pat
I’ve been studying the archives on this site now for weeks in trying to determine the best way for me to “attack” creative real estate investing, and I’m beginning to narrow it down along the lines of L/O’s.
Here’s a hypothetical scenario: suppose I began buying some single family homes with the intent of L/O for 2 years (not sandwiching, actually buying). Let’s say I do 6 homes a year, year after year, all with 2 year L/O’s…
My question is: are these homes “inventory” for dealer status with the IRS, or are they “investments” since I actually own them for at least 2 years?
My goal is to include seller financing when the options are excercised so I can spread my profits out with my yearly cash flow, and make a nice return on all the equities in the process.
Is this “do-able” or am I just trying to re-invent the wheel (the hard way)?
Thanks for all of your insight, and for a great site!
Steve
P.S. Anyone know of an investor group in the Portland,OR/Vancouver,WA area?
An IRS auditor might construe that all your properties were held for the purpose of selling for profit. It would not matter that you had a two year lease, since your tenant buyer could exercise at any time.
The auditor might argue that you did not demonstrate any intent to hold the property for investment purposes, and really wanted to sell them all along. Thus, the auditor would classify all your property that fits this profile as inventory.
With this determination, all your profit would be recognized and taxable in the year of sale, your depreciation expense would be disallowed, and you could be assessed penalties/fines in addition to back taxes.
If the IRS were to do this to you, all your profits could also be characterized as Schedule C income, and self employment taxes could also be assessed along with the appropriate penalties/fines.
I believe that your strategy could very well have this outcome if your return is audited. The caution here is that your intent determines inventory or investment use. Just leasing for up to two years on a lease/option or lease/purchase does not automatically make your property “investment” property. Your strategy suggests to me that you are in the business of buying property to resell for profit, and therefore your property is inventory.
Buying them subject to is great if you can afford it. Try to minimize so that you have no money of your own in it. Meaning that the T/B puts up more than you had to to acquire it.
DO NOT file as schedule C. Try to establish C corp for the properties that you do flip. Put the investment properties into a LLC that acts like a partnership. There are small nuances like not having your lease reference the option.
Of course, if you can get in with none of your money what is wrong with doing them in a Roth IRA and not ever having to pay taxes on the profits. Two years lease option are not sacred as it is the intent. Like putting an ad for rent first versus Lease/purchase from the get go. One year or less can still be investment property if done correctly.