Pay Taxes on Land Contract?? - Posted by John


Posted by JPiper on January 21, 1999 at 21:13:10:

My CPA sends a form 1098 (I believe that’s the number) to the buyer which reports interest paid by them during the current year.



Pay Taxes on Land Contract?? - Posted by John

Posted by John on January 21, 1999 at 14:17:58:

Try this again. I just bought a duplex for $45,000 and I’m planning on selling it on a Land Contract for $60,000 with $6,000 down payment and carry the balance with a balloon due in 24 months. My quesiton is…Do I have to pay taxes on the $6,000 down payment this year or can I pay when the balloon is due? I have a first on it for $45,000. I was told that I could apply the $6,000 to the intial cost of the property of $45,000 and bring it to $39,000. Would apprecitate any response you might have.



Re: Pay Taxes on Land Contract?? - Posted by Bill Gatten

Posted by Bill Gatten on January 21, 1999 at 18:40:07:

Once again, I concur with JPiper, however…

Why not sell it with a Land Trust designed to terminate in two years. This way there are no taxes due of any kind (except on any positive cash-flow) until the trust terminates; and the buyer can take write-off for interest without question, even in view of there having been no Contract for Sale (if there wasn’t one). I’ll try to briefly explain:

  1. A 2-year Title-holding [Land] Trust created in YOUR name alone
  2. A portion of the trust’s Beneficiary Interest is [subsequently] assigned to your “buyer” as Co-Beneficiary (10% to 50%): kind’a like a Partnership or closely held corporation between you and the buyer.
  3. In a Beneficiary Agreement, you agree to forfeit your interest to the buyer when the trust terminates in two years (assuming you don’t want to participate in the profit of Equity Build-up from Principal Reduction, and Appreciation).
  4. The buyer then executes a triple-net lease agreement with the co-beneficiaries (he and you)
  5. At termination, the Resident Beneficiary obtains his own [re]financing and buys the property from the trust, paying you back all of your beginning equity at that time, along with any costs your may have incurred on his(her) behalf along the way (if any).

John, with this arrangement, you retain full “passive loss (Depreciation)” throughout the Agreement; the buyer gets full “active” loss (re. interest and property tax). And… there is no tax on your gain, until the trust terminates and the property is sold by your 3rd party trustee (i.e., when we do them, there is always a 3rd party corporate trustee and an unrelated 3rd party collection agency).



Re: Pay Taxes on Land Contract?? - Posted by JPiper

Posted by JPiper on January 21, 1999 at 18:12:07:

What you were told is wrong.

Selling on a land contract is a sale. As such you will owe taxes on the sale NEXT year if the sale takes place this year. The question is what tax treatment you can use.

A land contract sale is an installment sale?.so you would pay tax on the percentage of principal received that is allocated to profit. This is done according to formula, so I would recommend a tax accountant.

However, if you are deemed a dealer for tax purposes, then tax on the entire profit would be due next year, eventhough you have not received all of the money. Whether you are a dealer will dictate whether you use the first or the second method.

In either case, a down payment on a land contract or any other type of sale is never used to reduce the cost basis in the property.

For more information see your tax accountant.



Re: Pay Taxes on Land Contract?? - Posted by JPiper

Posted by JPiper on January 21, 1999 at 20:52:15:


Thanks for the post. I’ve been reading enough of your posts that I actually think the idea of this trust is starting to sink in…slowly. An interesting idea on the deferral of tax on land contracts or other owner financing type vehicles.

I keep reading that you assign your “buyer” a portion of the beneficial interest, this portion ranging between 10-50%. Later you forfeit your beneficial interest to the resident beneficiary when he buys the property from the trust. My question is what dictates the percentage of beneficial interest that you assign your buyer? What difference does it make whether it is 10% or 50%? Is there any implication to the particular percentage assigned?

Next question. Is there a value placed on the property at which the resident beneficiary buys the property?? Can this be ANY value, or does it have to be some particular value?

Last question. Am I correct in assuming that the triple net lease that is executed can be executed at any monthly amount?

Thanks again for your posts Bill.



? - Posted by DavidV

Posted by DavidV on January 21, 1999 at 21:04:41:

What, if any, responsibilities does the seller have to the buyer as far as tax information? (i.e. interest paid for the previous year)