Land contract & tax consequences - Posted by The Baze

Posted by The Baze on March 02, 2000 at 11:00:26:


I read it last year in a tax newsletter - RIA Weekly Tax Alert, July something - we get here at our office. I haven’t had a chance to look up the specific regs - they were still temporary regs as of Sep 99. But as soon I can find the specifics, I’ll let you know.

Land contract & tax consequences - Posted by The Baze

Posted by The Baze on March 02, 2000 at 06:41:16:

Got a client who sold a house on a 30 year land contract. I understand that the IRS regards this as an installment sale. But, in this case, the “seller” is required by terms of the agreement to pay the property taxes, maintain insurance on the property, and be responsible for exterior repairs subject to a specified threshhold. Sounds like a rental to me - substance over form. Except that after the 30 years, the “buyers” get deed to the house for $1. If I treat this as an installment sale, where do I report his payment of property taxes, insurance, and repairs in future years? Thanks.

Tom Bazley

Definitely a Sale - Posted by William Bronchick

Posted by William Bronchick on March 02, 2000 at 16:27:50:

The IRS calls a land contract a sale. It also calls anything that LOOKS like a sale, a sale. Thus, even a lease/option with a $1 buyout at the end is considered a sale. Many court cases in Tax Court have confirmed this.

Re: Land contract & tax consequences - Posted by Bud Branstetter

Posted by Bud Branstetter on March 02, 2000 at 09:41:09:

This is the same approach Merle Wooley uses on his L/O sales. It also started the controversy that drove him from posting, though I’m sure he monitors the site once in a while. Substance says that a 30 year contract is a sale. I’ll bet the rent is high enough to cover all the taxes and insurance. How many successive contracts of three years each would trigger the sale I don’t know. But you would have one big tax bill to recapture the depreciation on the sales in one year. Did you ever come up with that reference you mentioned about a new IRS reg on recapture over the life of the installment sale.

Merle has abandoned his old philosophy. - Posted by Rick

Posted by Rick on March 03, 2000 at 02:10:07:

Just so as not to mislead anyone who might think that Merle Woolley is still doing 30 year lease-options, according to his latest e-mail letter to the people who purchased his courses, he has abandoned that practice in favor of 3 year lease options.

Here is a quote from Merle: “Originally, we established their monthly payment on a 30-year amortization, added the taxes and insurance, and gave them a rent credit equal to the ?principal? amount each month shown on the amortization schedule. In 3 years on a $60,000 note, they accumulate about $900 toward principal. Now, we credit them with an amount from $50 to $200 per month, depending on how much profit we have in the property. They must, however, pay on or before the due date to get it. Fail to pay on time and they get no rent credit for that month. They get this only for the first 3 years. After 3 years, if they have not paid us off, we will write a new L/O, giving them the credits they have earned and then back to rent credits as shown on the amortization schedule for the next 3 years.”

He has also modified his “private banker” system. It seems that one of his students got into trouble with his state’s SEC. That state contacted Missouri (Merle’s state), and the Missouri SEC sent a letter to Merle about his practices. Now, Merle no longer combines more than one investor’s money with other investors’ money on a single mortgage. He now uses only one investor per property.