Posted by JohnBoy on October 04, 2003 at 21:30:19:
Ron,
I know this is the case for real estate sales. We are talking about the sale of a business, which this is not the case.
land contract gone bad - Posted by dkanan
Posted by dkanan on October 01, 2003 at 10:17:42:
I need some advice (quick)
I entered into a land contract and turned around and sold it on a lease option. Well a year has gone by and the tenants want to excercise their option. I’m talking we have a date for closing in one week.
Everythings hunky dory and I’m about to walk away with 20,000. I called the people I have the contract with for a payoff. They said in the land contract it states they wanted one half of the payoff in one year and one half the next (thats what their accountant told them to do) They will not accept full payment. Are my hands tied on this one. Can’t I get in trouble by my tennants who i have a contract with because they are actually not able to close.
Please help
diana
Re: land contract gone bad - Posted by Andrew
Posted by Andrew on October 03, 2003 at 08:48:41:
Diana,
I had a similar situation, but addressed it in advance. My Seller does not want to be paid off for 5 years due to tax issues he’s currently trying to resolve, but I want to sell the property this year. So the Seller agreed, in writing, to take another property as collateral (i.e. walk the mortgage/contract to another property) in the event that I wanted to pay him off before the 5 years is up.
Since you own other properties, why not ask if you can give them 1/2 of their profit now and a secured note for other 1/2 payable in 1 year? Just make sure you have the other 1/2 available to pay them when the note comes due.
Just my 2 cents…
-Andrew
Re: land contract gone bad - Posted by TomC (Md)
Posted by TomC (Md) on October 02, 2003 at 11:54:14:
It’s probably a income tax issue for the owners of the property.
Since it is close to the end of the year, how about setting a closing date for Friday, Jan 2nd. Get some cash lined up from somewhere (short-term loan for 2-4 weeks) and disperse 50% of the amount you owe the sellers on December 29th AND MAKE SURE THEY DEPOSIT IT BEFORE THE END OF THE YEAR.
Then go to closing on the Jan 2nd, 2004. The settlement co will disperse $$ to satisfy the land contract and give you the rest. Take that money and pay back your short term lender - they pocket the rest!
That will give the sellers 50% of the taxable income in 2003, and the other 50% in 2004.
Explain to the buyers that it’s only about 90 days to 2004 and closing can take 30-60 days anyways…so it’s not like they are getting help back that far, anyways!
Besides, if they close in October/November, I bet it’s not enough of an interest deduction for the buyers anyways - they will still probably take the std deduction instead of itemizing.
TomC
Re: land contract gone bad - Posted by Del-Ohio
Posted by Del-Ohio on October 01, 2003 at 19:12:11:
If you have a good relationship with your land contract holder, you can get the information Ron Starr asked for and you can confidently present them the options, this has the possibility of saving you the most money.
If you want to keep it simple, ask them if you paid the extra expenses they will incur if you pay off early, would they sell now.
Then have them ask their accountant (who they apparently trust)what that cost would be. It may only cost you a few thousand extra. Find out, then you will be in a much better position to decide what to do.
If the penalty is $2,000 your strategy will be different then if the penalty is $50,000.
I am selling a business right now. I am financing a big chunk to avoid paying 50% in taxes. If the buyer wanted to pay me off early and paid even 75% of my penalty I would let him pay it off right now.
Hope you can make this work out.
Del
Re: land contract gone bad - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on October 01, 2003 at 13:10:07:
Diana------------
Whoa, you are in some possibility of being in trouble, aren’t you?
First congratulations on getting out there and making a deal and making one that will probably bring you a bunch of money for what was probably not much work or money. Right?
You are in a situation were an attorney’s opinion might be useful.
I have a couple of ideas that might save the day for you. However, I need more details to be able to do so.
First, what is the relationship of the owners to this property. Was it their own home? If so, did they live in it for 24 months or more during the past 60 months? Was it a rental property for them? If so, do they want to continue to own rental property or investment property?
If it was a rental for them, do you know when they bought the property and for how much? When they put into service as a rental property? What price are you paying them for it? This allows me to calculate the taxes they might have to pay should you pay them right away.
What sort of a relationship do you have with them? Good?
Talk to them and find out the answers to the above questions if you don’t know them already. Explain to them that you want to maximize the benefits to them and at the same time prevent any problems for your buyers. Be a little humble and say that you will take a lesser profit if neccessary to make them happy. You can tell them that you will be consulting with a couple of long-time “expert investors” you know so that you can provide them with the very best situation for themselves. You need to know what their situation is and their goals.
Answer the questions and then write again.
Good InvestingRon Starr*
Re: land contract gone bad - Posted by Brent_IL
Posted by Brent_IL on October 01, 2003 at 12:02:39:
?Are my hands tied on this one??
- For the most part, they are. This was your deal and negotiated by you. I know this is after-the-fact, but why didn?t you know what was in the contract you signed with the property owner? All valid contracts are binding on the parties. No one held a gun to your head and forced you to sign the CFD. Now you have to live with it.
?Can’t I get in trouble by my tenants who I have a contract with because they are actually not able to close.?
- Yes, you can get in trouble with your tenants. They may want to exercise now before rates rise. The trouble isn?t because they are actually not able to close, they are. You are the one who doesn?t want to close. Do whatever you have to accommodate the tenants. Otherwise, its lawsuit time, and you don?t have a defense.
?They said in the land contract it states they wanted one half of the payoff in one year and one half the next (that?s what their accountant told them to do) They will not accept full payment…?
- It does no good to speculate on their motivations. They don?t want to accept full payment because they will pay additional taxes. That?s between them and their accountant. You can offer to pay any addition taxes, penalties, and fees that they may incur. It might be less expensive to pay the tenants to wait for another year.
Forget the closing in one week. Your $20,000 profit is secondary to getting out of this without legal complications. It’s probably past-tense anyway. You screwed up. This is the consequence. Fix this even if you lose money, Would you want to appear on the local news as the evil creative real estate investor who scammed poor inexperienced tenants, but got her comeuppance when the jury awarded punitive damages to ?send a message??
Re: land contract gone bad - Posted by Randy
Posted by Randy on October 01, 2003 at 10:28:17:
Sounds like they want the interest on the 2nd half for the 2nd year. Have you asked them what is their concern in taking all cash now? It?s either interest income or capitol gains taxes on the sale? You may have to agree to pay them the interest they would have earned or the increased taxes they will pay receiving a full pay off now. Yes you have to close with your tenant?s even if you lose money.
Re: land contract gone bad - Posted by JohnBoy
Posted by JohnBoy on October 01, 2003 at 23:01:12:
How does financing a chunk of the sale avoid paying higher taxes? Last I heard, the tax laws were changed where you have to pay all the tax on the sale of a business whether you get paid in full or finance it. It doesn’t matter. The only way to avoid the tax hit would be if you were taking that money from the sale and buying another “like kind” of business. But if you are just selling the business, you have to pay the tax on the full sale. It use to be that if you financed the sale you only had to pay the tax as you recieve the money. But that was changed back in the 80’s.
Did they change it back again recently?
I went through this back in 93 on a business I purchased. The seller was financing 100% of the sale. But under the new tax laws he would have had to pay the tax on the sale even though he was financing it. We had to get creative and structure the sale a different way so he could avoid paying and tax. In his case he also owned an equipment company. So instead of selling me the business, he leased me the equipment through his equipment company on a 5 year lease with a $25k option to buy the equipment at the end of the lease. The lease was structured to where we leased the equipment over 5 years for the price he wanted for the business. Then he leased us the property under a seperate lease which he owned personally. We had to change the name of the business as well. That way he technically closed his business and leased us the equipment where we opened up the business under our own name.
So unless the tax laws have changed again pertaining to how they treat the sale of a business, you will have to pay the tax on the total sale price regardless of how you get paid on the sale. Unless you are rolling the money into another “like kind” of business, only then can you avoid any tax.
Re: land contract gone bad - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on October 01, 2003 at 20:24:40:
--*-**- I received the following via e-mail from Diane.
-----* THE E-MAIL -------
Hi Ron,
That was a joke about making a lot of money with little work wasn’t it?
Anyway, thanks for answering.
I don’t have that good of a relationship with sellers. I am in a
financial
struggle and I got behind on a couple payments and they were not happy
campers. They had even taken it to a lawyer at one point and wanted to
take
the house back and I got it caught up real quick. They are an older
couple
who has everything planned out through their accountant and lawyers
which is
understandable (I just seem to foul up there tidy little plans)
I want to wash my hands of realstate (I have seven properties that are
not
doing so well–I’m a terrible landlord and a screw up when it comes to
money. )Taxes? nah, I’ll pay those next week)
They have had this property for approx 15-20 years. It has always been
rental income.
When I called her for the payoff her exact words were “that ain’t gonna
happen”
By the end of the conversation she did say she would check with her
husband
(who is out of town)accountant and lawyer.
The other problem I have is I borrowed 10,000 to get into this deal. I
have
to give that back and hopefully some profit to him to save face.
HELP!!! I’m a textbook case of what not to do.
Any words of advice would be appreciated.
----- RESPONSE ------
dkanan–Diane----------------
If they would entertain the prospects of purchasing a new income property, you could encourage them to do a 1031 exchange of the money they get from the sale of this property into some other property. Then they would delay any tax at all on the new property, provided the bought it for at least as much as the sales price of the property in which you are involved and has as much of a loan as they had on the old property.
You might even volunteer to find them a great deal, if you think you could. That would make up for screwing up this deal.
It sounds like you are not finding real estate investing very congenial to you. I can appreciate that. I am not the best investor around nor the best businessperson. I have had to change quite a bit to get up to the level of mediocre. Perhaps you can do the same.
Also, consider that the approaches you have done so far may not really suit you too well. There are so many different ways to make money with real estate, you might be able to find some other way that fits you better. Have you read my post for beginners? If not, you can find it by putting “beginners success” into the search function of this main bulletinboard forum of this CREONLINE.COM website.
Good Investing***********Ron Starr****************
Re: land contract gone bad - Posted by Del-Ohio
Posted by Del-Ohio on October 02, 2003 at 24:17:41:
The company I own was originally set up as a C Corp. I elected to change it to an S Corp 8 years ago. Selling a division of the business “reactivates” the C Corp taxation, if done within 10 years after making the election. In Effect double taxation.
I took a down payment for the amount of the inventory. With the help of my accountant we got a little creative and significantly reduced the tax consequences on the balance by signing an employement contract and taking it through payroll of the buyer.
Del
Re: land contract gone bad - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on October 01, 2003 at 23:41:07:
JohnBoy-------------
What is true for investment properties is different from what is true for businesses.
This is called electing installment sale treatment of the sale. If you, as the seller, of an investment property carry back a loan for the seller and get payments in at least two different tax years, you pay the taxes only as the gain is realized. That is, when it is received.
That means the seller loans to the buyer money that is owed to Uncle Sam for the gains taxes. And gets interest on the money. Not too bad a deal, I’d say. Of course, Jack Reed recommends never doing this. He says always get cashed out when you sell.
Good InvestingRon Starr*********