Lonnie Deals and Taxes? - Posted by mike

Posted by Chuck-NY on April 03, 2002 at 16:37:50:

Don’t forget that when you have expenses against that MH you subtract those expenses which means your gain is less than your previous figures showed.

Now if you Net Leased & Optioned those same MHs instead of doing Notes, you could get the tax deduction of depreciating those MHs.

Lonnie Deals and Taxes? - Posted by mike

Posted by mike on April 02, 2002 at 21:46:42:

ok, I read the post about cash method accounting, doing Lonnie Deals, and frankly, don’t understand it.

Instead of squeezing every last drop out Uncle Sam to get that extra $100 or $200 a year savings on your taxes, isn’t there an easier way??

It seems to me it would be the capitol gains tax, no?

I mean If I have property bought at $3000, and sell it for $5000, wouldn’t I have a capitol gain of $2000?

I am ready, to get my first deal done. I have plenty of $$$ to invest. But I just do not understand the tax part of it. If for simplicity sake, I wanted to just pay capitol gains tax, what would it be? In the Cash method example, he said “assuming you are in the 28% tax brackett…”

Isn’t this assuming you have a JOB, and a regular income?
Isnt there a way to seperate the two? I don’t see how one really applies to the other. I mean one is a “income” tax and the other is an investment tax, no?

God I’m confused. If anyone is willing to take me under their wing, and give me some examples I’d be really happy.
You can email me at cbaldwin2@carolina.rr.com.

Why couldn’t it be simple and say “if you have a capitol gain of under $100,000 you pay XX% on the gain” then bingo, it would be simple.

Re: Lonnie Deals and Taxes? - Posted by David (OH)

Posted by David (OH) on April 03, 2002 at 11:58:49:

Like Bill-TX said, a traditional lonnie deal is a short term capital gain and is taxed just like it is a JOB salary. If you have a another source of income, the lonnie deals will be added to that source to determine your tax bracket.

The reason for the “cash method” is to DEFER taxes, not to squeeze it out of uncle sam. You will owe every penny of tax in both methods, the only question is when will you pay it. And why defer payment? Because you are getting paid over several years yourself. If you have the money just sitting around to pay the entire amount right now, I agree that it might be easier to do it that way. And in almost every case, we are not talking $100-$200. If you are only saving $100, you are probably not buying or selling right.

Ok, to use your example. You buy for $3000 and sell for $5000. I will assume you get $1000 down and create a note for $4000. In the accural method, you pay on a gain of $2000, which is roughly $600 (30% tax bracket if such a thing exists). On to the cash method. We will assume your $4000 note is worth $2000. If this is the case you have a gain of $0 and a tax of $0 for this year ($1k cash + $2k FMV of note - $3k purchase price). Cool huh? Your $600 tax will be spread out over the next several years. Now do several deals in a year and you will owe alot in taxes. I talked to someone once earlier in my studying on the cash method who saved (deferred) thousands, no tens of thousands with the cash method. At that point, it pays to have a CPA.

Heck, its April. You have a whole year to worry about this tax stuff. Try not to worry about it right now and learn to do the deals.

Good luck,

Re: Lonnie Deals and Taxes? - Posted by Bill-TX

Posted by Bill-TX on April 03, 2002 at 08:58:12:

You could claim it as capital gains. Since it would be a short term gain (held less than 12 months), it would be taxed the same as salary. So it is a wash with regard to the actual taxes. I think the forms might be easier for the cash method.

Ok but… - Posted by Mike

Posted by Mike on April 03, 2002 at 13:04:07:

I got you now. I think. But I still have a few questions. Who, or what determines the “worth” of the note. I mean, If I sell something and create a note for it for $4k, it seems to me that the note is worth $4k!!! How do you come up with the note only being worth $2k?? Do you determine that? Does the government? Who, what???

Secondly, has this method “held up” under REAL IRS scrutiny?

Thanks. Also, please see my other post above!!

Re: Lonnie Deals and Taxes? - Posted by Tony AZ.

Posted by Tony AZ. on April 03, 2002 at 10:08:14:

Find yourself a local CPA
To help you out with your tax questions.
They are always looking to help future clients.
Good Luck !

Re: Ok but… - Posted by David (OH)

Posted by David (OH) on April 03, 2002 at 21:19:46:

If I have a note for $4k to be paid over the next 3 years, you will give me $4k cash today for the right to collect on that note? I didn’t think so. You would want a discount, a built in profit if you will, to agree to take payments vs having cash. This is the premise for the note having a fair market value. Note buying and selling is a completely different game to learn, but for simplicity sake I just said the note is worth 50% of it’s face value. For your taxes, you could get someone to quote you a price to buy your note. Keep that piece of paper as backup in case of audit.

To my knowledge, no one has been challenged on this method. If John Hyre is around, he might respond. I’m sure if someone was challenged, he would probably be aware of it.