Re: HR’s Post about DOS and Land Trusts - Posted by Bill Gatten
Posted by Bill Gatten on May 25, 1999 at 19:40:21:
In the preceding long thread on the subject, I spent a lot of time (too much) trying to defend the position of the PACTrust™ on the issue of its not violating the DOS (Dan Lubelle is 100% correct in his assertions on that point, from the standpoint of the Codified Federal Regulations [T12(V5)p500-599]. The point I tried to make (badly) was that a lender’s challenging the claim that the DOS was not violated, and the actual violation of it were not the same things. I now concede completely and agree that the CFR’s would prevent any property owner from putting a non-owner occupied property into ANY type of inter-vivos (living) trust: i.e., those rentals your parents vested with their inter-vivos family trust were so vested illicitly (if not illegally) according the CFR’s.
In a much shorter version, the following is what I tried to convey.
WHEN a property is in a land trust, and the owner doesn’t live in it…the opportunity for the DOS violation occurred (IF it did) upon creating the trust (re. CFR’s and FHLMB [Fed. Home Ln. Mtg Bd.] Interpretations of Garn St. Germain)…NOT when a co-beneficiary interest in the trust was sold or assigned: NOT when the co-beneficiary moved into (or took possession of) the property; NOT when the co-beneficiary assumed the payment and tax responsibility along with the tax benefits and all other benefits and incidents of homeownership.
HOWEVER…(Listen! This is important!) the DOS violation potential is NOT (and never was) the main, or even a primary or very important, reason for using the PACTrust™ if you are an Investor. The DOS benefit is only a major (powerful) selling tool when you’re up against someone who THINKS it is important. The more functional reasons for the PACTrust™ are: it is a most effective means for shielding the property and the title from litigation and liens (IRS, BK, creditor judgements, etc.)… a single beneficiary trust just can’t do that. Also the PACTrust™provides an excellent and legal means for being able to “sell” or “trade” tax benefits to a tenant for profit and additional income… in other words, in exchange for higher rents and the tenant’s agreement to pay for all costs of ownership (i.e., without the Risk and Burdens of Ownership, no tax write-off is allowed–see IRC 163(h)4(D): that means if you don’t have to fix it when it breaks, you are not the owner, and you don’t get the write-off).
Also understand that this program is not dissimilar to what Bill Bronchik teaches…as a matter of fact most of its primary documents are very much the same… it merely includes additional steps (e.g., a choo-choo train is not dissimilar from its engine).
As I said in the previous post: If you don’t have mice… then you don’t need a better mousetrap. Period!
As Jim Piper pointed out in a previous post: Many folks couldn’t care less about the DOS issue. Others couldn’t care less about tax benefits. Other couldn’t car3 less about protecting th “other guy,” But none-the-less, I think most are concrned about one or more of those issues and about shielding themselves from the “other guys” legal, tax, and personal problems (creditor judgements, tax liens, BKs and marital actions). But again, if none of these “features” become “advantages” and none of the advantages are “benefits,” then you don’t need ANY of it.
In MY position (most often as a consultant to both sides) I am in the middle, and by necessity have to look at the entire transaction from that vantagepoint. Personally, I love any program that protects the buyer to the same degree that it protects the seller or the guy in the center of the “sandwich” (regardless of which position I hold in the transaction). However, in all candor, after hanging around this board for as long as I have…if I was flipping a property and needed only a brief holding period?I’d use a Lease Option (there! I said it! And it wasn’t easy for me to take the “probably” out of that last sentence).