Posted by JPiper on December 15, 1999 at 10:21:52:
I agree with your statements…I just don’t think that’s really what DaveT said.
JPiper
Seperating “holders” from “dealer” entity… - Posted by Tyler
Posted by Tyler on December 12, 1999 at 21:24:04:
I’ve got a property under contract to purchase in the name of my corp. Up until now, all the corp has done is buy and sell.
I’ve decided that I want to keep this property, and sell on LO or Land contract.
Although my plan is to stick them with my mortgage master immediately to get them refinanced, it may take longer than a year. If this were to happen, my corp would be taxed, of course, on the proceeds of the installment sale within the year of the sale…even though I may not see the gains until the following year.
My question.
I know we discussed this awhile ago when we were on the topic of 1031’s and defferring tax on gains indefinately. However, I still need to solidify some of the strategies in my mind…now that I am confronted with the situation. I also plan to do a lot more deals this way, so I’m trying to figure out how that will affect my “dealer” corp.
Do I just simply form an LLC for each of these “holders”?
Although the contract is in the name of my “dealer” corp, couldn’t I just take title in a Land Trust and make a seperate LLC the beneficiary?
Another question (probably another thread, but worth bringing up here)…
My strategy with these “holders” is to stick someone in immediately (after rehab–as minimal as possible), get premium monthly payments, a substantial down, and the highest possible sales price on the back end. Having said that, which would be the preferred method of sale: Lease Option, or Land Contract?
I had been planning on selling on LO, and then listened to another investors strategy which involved selling on Land Contract. He just dealt with the fact that he’d be paying the tax in the year of the installment sale.
I was sure, however, that there were ways to seperate these from your “dealer” sales, through seperate entities and LO sales.
Thanks in advance for the clarification…
NT
Re: Seperating “holders” from “dealer” entity… - Posted by JPiper
Posted by JPiper on December 15, 1999 at 10:47:04:
Hi Tyler:
I intended to respond to this earlier?.but had a bout of the flu. Hopefully my brain is back to normal.
I think DaveT is right as far as he goes. The point he makes is that the IRS looks at ?intent? for the purposes of deciding your taxable status. Therefore, if you?re going to possibly be speaking with the IRS in the future, you need to learn a new language. You don?t say anything like ?I bought this here property so that I could immediately resell it on a lease/option.? Those would be fighting words to the IRS?.and could conceivably result in your being classified as a dealer for that particular transaction.
Unless you?ve got something figured out that I don?t, I don?t view a lease/option as a SALE. Where?s the sale? The tenant/buyer is paying a rent payment UNTIL the day he exercises the option to buy, IF EVER. That?s no sale in my book. No funds changed hands, no title passed, I?m still paying the taxes, the insurance. No sale. And I don?t call it a sale.
More importantly though, ?intent? is going to be established by your actions, what you DID, as opposed to what you say. If the IRS would only listen to what we all had to say, I think our lives would be much simpler since we could all learn to say exactly what the IRS wanted to hear. But unfortunately, the IRS looks at what you DID to establish intent.
Most people believe that ?holding? the property for a period of time goes a long way toward establishing ?intent?. My opinion is that a property should be held for 2 years. Some people think you can hold them for a year. I think that?s too short. But keep in mind it isn?t clearly defined by the IRS.
The next thing is that your lease/option should not look like an installment sale to the IRS. Lease term should be short?.I write mine for one year, with one renewal. In some states leases for longer than one year are supposed to be recorded…so that’? another factor to consider. Verbally I tell the tenant that I will carry the property as long as I need to in order to get them refinanced?..assuming they make timely payments. But I don?t put that in writing.
I would make certain that the rent credit is not equal to the principal component in an amortization schedule.
You want to pay the taxes and insurance yourself?.not have the tenant do it.
In short, make certain that your transaction does not have the characteristics of a land contract.
Given this, then the point is that a lease/option can be treated as a rental?the contract for deed treated as a sale. I would do the contract for deed in the corporation since the tax is due in the year of sale.
For lease/options I would not do them in my dealer entity (although I?m told even dealers can have investment properties.) I think it?s easier to segregate the properties?and therefore for properties of this type I would probably go with an LLC.
JPiper
Re: Seperating “holders” from “dealer” entity… - Posted by LIsa
Posted by LIsa on December 13, 1999 at 08:38:03:
What is a dealer?
Re: Seperating “holders” from “dealer” entity… - Posted by Dave T
Posted by Dave T on December 12, 1999 at 23:40:06:
“I’ve decided that I want to keep this property, and sell on LO or Land contract”.
This statement tells me that you are still acting as a dealer. You are buying property that you “hold” primarily for sale. It does not matter how long you actually own the property before the sale, or the method used to finance the sale (e.g., land contract or L/O). Your activities are still dealer activities. All your profit is still taxable in the year of sale, and your property is not eligible for 1031 treatment. As such, I suspect that it is to your benefit to conduct those activities in your corporate entity since the tax rate would probably be more favorable than a pass through entity such as an LLC.
Since all of your profit is taxable in the year of sale, then (of the two options you mention) I would prefer to sell with a lease option. You have designed the provisions of your lease option so that you have a very high expectation that the tenent buyer will exercise the option. When that happens, the buyer gets his own financing and cashes you out. Since all of your profit is taxable in the year of sale anyway, it would be better to receive all of your profit in a lump sum in the year of sale. Now you have the cash to pay the taxes. This won’t happen with a land contract unless the profit margin is slim enough that the buyer’s down payment covers your tax bill,
Re: Seperating “holders” from “dealer” entity… - Posted by Tyler
Posted by Tyler on December 15, 1999 at 12:36:52:
Piper,
Glad to hear you’re over your flu…I just got over mine!
Here’s my deal.
As I’ve indicated before, my plan is to purchase these properties with private money, then put someone in the property as fast as possible. The goal is to get the most money up front, the highest monthly payment, and the best purchase price that the market will allow. I want to immediately put the “buyer” with my mortgage man and try to get them refinanced. Ultimately, I’d like to realize the paper profits that I create at the time of the sale, within one year or less.
So, with that in mind…
I’m wondering first which is the preferred method of “sale”. (Understand that I would not LO to anyone who my MB didn’t think he could get financed within a year). So, just between me and you (smile), my “intent” IS to sell. My patterns will show the same thing, should the IRS ever look to establish that “intent”.
A couple of days ago, I dug up some old Legrand tapes on Working with Private Lenders. (I was surprised, by the way that he has “absolutely NO agreements or contracts with them other than the note and TD”)
On the tapes, he had an interview with John Ulmer, and talked a bit about his system. It was very interesting to me, because it is almost exactly what I’m trying to create. The only difference (which is why I’m asking these questions now) is that he sells every single property on a Land Installment contract. Then, he too would immidiately tickle the vendee to get them working with his refi guy.
It made me wonder if there were advantages to going that route vs. “selling” (sorry) on Lease Option. Then, when that question is answered in my mind, the entity issue comes up.
So, really, there are two questions:
Which “sale” method is better, given the nature of my quick refinance strategy?
Based on that answer, would it still be appropriate for me to do these through my “dealer” corp?
(Since even the LO deals would be most likely pushed through in a year or less, it seems to me it would be difficult to show “intent” of anything other than that of buying and selling.)
Thanks, as always.
NT
Re: Seperating “holders” from “dealer” entity… - Posted by Steve-Atl
Posted by Steve-Atl on December 14, 1999 at 10:18:45:
I agree with Dave T. Lease/option is a good way to avoid paying tax before profits are collected.
Since the percentage of people that actually exercise an option is small (without your help and encouragement), its a good way to sell a property that you really want to keep.
Re: Seperating “holders” from “dealer” entity… - Posted by JPiper
Posted by JPiper on December 15, 1999 at 18:45:22:
I think you will find it easier to refi a contract for deed than a lease/option. Chances are high you will get a larger down payment on the contract for deed.
Going the route that you are suggesting clearly makes you a dealer. In that case, your transactions should be in a corporation. You don’t need a new one…any old dealer corporation will do.
JPiper