Lonnie deal tax question - Posted by Tony-VA

Posted by David Alexander on February 21, 2000 at 19:54:47:

Yes, this was my point and your answering it saying that the related thing is the problem if I understand correctly.

So the only problem to solve is the related issue between the LP and Corps, correct. Why would it be so hard to do that?

David Alexander

P.S. I know I’m thick headed…, and I lost the email you sent me, got deleted by accident before it was printed.

Lonnie deal tax question - Posted by Tony-VA

Posted by Tony-VA on February 18, 2000 at 22:58:29:

I am soliciting different suggestions on how to fund the tax consequences of Lonnie deals. Since these deals are treated as dealer status, we are not afforded the luxury of installment sales, and thus get banged hard on the capital gain in the first year of the sale.

How are the pro’s compensating for this. Dirk mentioned that he sells 1 in 4 deals for cash to cover the taxes. I imagine that loaning against a note to pull cash would be another way.

Any other comments or suggestions would be greatly appreciated.

Many thanks,

Tony-VA

Know the feeling… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 20, 2000 at 08:03:20:

The shabby tax treatment of mobile dealers greatly diminishes expected return. Example:

  • pay $2500 for MH, including lot rent and all other expenses.
  • sell within 2 months for $1000 down, $7000 note with 12.5% interest, 36 payments of $234.18.

Returns (using Excel IRR function, which slightly understates return because it assumes cash is received at end of year and not during year):

After-tax (Assume 31% federal rate, no state tax): 63%

Before tax: 179%

OK, 63% return ain’t bad, but Sheeesh! Whatta difference! This difference becomes MUCH larger proportionally if notes are carried for longer terms- a good reason to avoid long notes if possible.

Solutions? First, I am in the process of converting to exempt money. Granted, you can’t live off of money that you can’t reach- as is the case with IRA money. Of course, I do not need to consume the MH money- that’s what the old J-O-B is for. If my job gets too expensive to keep, I’ll look into charging the IRA fees for investing the dough.

Second- use charitable contributions. I believe Dirk does this. The catch is: My impression is that capital property gets more favorable treatment than dealer property for contribution purposes. So I am kicking around the following proposed (i.e.- do NOT try this without appropriate advice!) solution: Seperate MH and Note companies. Note company buys notes from MH company at a discount (@50 to 60%) of face value. Note company is an “investor” as opposed to “dealer” for tax purposes because the notes are held, not sold- so notes are capital gains type property. Once in a while, note company (an LLC) contributes note to a charity and continues to service the note (probably for free). Full face value of note is chartiable deduction. This works best with notes that are greatly appreciated. People do this sort of thing with stock all the time, but I gotta check & see if it works with the note structure I’ve proposed.

John Hyre

Re: Lonnie deal tax question - Posted by MarkF (NorthernCA)

Posted by MarkF (NorthernCA) on February 19, 2000 at 13:17:53:

Hello Tony…

I to would love to hear any and all suggestions on this topic. Starting to get into a few lonnie deals ourselves and although am not really worried about the tax consequenses I am very interested in knowing the best way to handle the whole tax situation. Well Tony hope you are well…and that you are finding all the success you want…:slight_smile:

Sincerely Mark

Fantastic Idea - Posted by PeteH(NYC)

Posted by PeteH(NYC) on February 20, 2000 at 13:39:14:

… I especially like the advantage of selling the note to the separate entity at a discount, thereby lowering the dealer’s actual (taxable) gain.

Re: Know the feeling… - Posted by David Alexander

Posted by David Alexander on February 20, 2000 at 13:37:44:

Exactly, what I had proposed before. Two C corps and a LP.

Corp 1 buys the MH, Say for 2500. Sells for 10,500 and creates a note for 10k.

LP buys note for 30-50 cents on the dollar which is realistic and shouldnt cause problems with the IRS.
(50 cents in this example)

LP now has the note for 10k as passive income.

Corp 1 has 5500, 5000 from sale of note and 500 from down payment.

Corp 2 (Nevada) charges a management fee to corp 1 to expense (drain) money out of corp 1. In the process corp 1 and corp 2 are paying nessecary expenses with before tax money.

Because corp 1 has no money it has no franchise tax.

You can avoid controlled status if you read the rules on Corps and have different owners, ie. you and your spouse.

David Alexander

DANGER Will Robinsom DANGER! - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 20, 2000 at 19:19:08:

Selling to related party at a loss will NOT lower your gain! The tax savings come in when the appreciated note is contributed to a charity- then you get a deduction as an offset. Same basic result, but I don’t want anyone to think that selling to related entity at a loss reduces gain from the initial MH sale.

John Hyre

Re: Know the feeling… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 20, 2000 at 19:15:44:

Hi Dave,

I do not follow where the taxes are being saved, assuming you mean federal tax. Whether the set-up avoids franchise tax- I don’t know, depends on the state & its specific rules re related parties. The set-up does NOT get around federal with husband & wife. Now, I know you are in texas- how come you’re not using that LP exception we’d discussed? I KNOW it works to avoid franchise tax in Texas…several Fortune 500 companies are using it to good effect.

John Hyre

Riddle Me This, Batman… - Posted by PeteH(NYC)

Posted by PeteH(NYC) on February 20, 2000 at 19:42:20:

Is there not some benefit in exploiting the different tax statuses of the dealer corp. and the holding corp., in that the holding corp. is not obligated to pay tax on the entire gain (from buying at a discount) in the year of sale, since it’s holding the note as an investor?

Exccccccellennnnnnnt, Smithers… - Posted by JHyre in OH

Posted by JHyre in OH on February 20, 2000 at 20:14:48:

Pete,

None that I can see…in fact mixing the 2 requires a certain degree of care. If you mix dealer property with investment property PRESTO! WHAMMO! (Much like the POW! and BAMF! in that awful Adam West Batman series) the investment property becomes dealer property. If the property is initially dealer property and you sell it, you take the full ordinary gain…subsequent conversion to investment property is no problem, cause the IRS got its pound of flesh. But if you have dealer property that is “converted” to investment property, and THEN sold before 2 or so years, you run the risk of tainting your whole pool of investment property as dealer stuff. Most uncool. Nice try! By the way, at the risk of being rude, I hope Guliani stomps the $%&*! out of Hillary.

John Hyre

Doh!! - Posted by PeteH(NYC)

Posted by PeteH(NYC) on February 21, 2000 at 09:38:04:

This may just be a question of my not being entirely clear on your use of the word “property,” but:

The scenario I picture involves selling a MH (the “property”) for a significant mark-up, collecting it in the form of a receivable (the “paper”). At that point, a dealer entity owes tax on the entire gain, even though he receives the gain over time. We’re good so far. But when the dealer entity sells the paper to the investor entity, he’s not converting the PROPERTY to investment property (he no longer owns it), he’s selling the PAPER at what looks like a loss (the discount). No?

To illustrate: Dealer buys MH for $1000, sells it for $500 down and a $3500 note. Dealer then sells $3500 note to investor entity for $2000. At the end of the tax year, is dealer not eligible to declare his profit on the MH to be $1500 rather than $3000? And wouldn’t the investor entity claim his $1500 cap gain as it trickled in over the term of the note?

Mmmm…Must kill the boy…Must kill the boy… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 21, 2000 at 10:50:11:

“To illustrate: Dealer buys MH for $1000, sells it for $500 down and a $3500 note. Dealer then sells $3500 note to investor entity for $2000. At the end of the tax year, is dealer not eligible to declare his profit on the MH to be $1500 rather than $3000?”

Profit is $3000. $1500 “loss” upon sale to related entity is suspended until related entity makes $1500 gain on that property.

“And wouldn’t the investor entity claim his $1500 cap gain as it trickled in over the term of the note?”

Very unlikely based on step-transaction/substance-over form principles. Otherwise, you could change character of gains at will always. The result you want does occur if you sell to non-related entity…but the loss is then “real” in that you actually did sell at a discount.

John Hyre