Tax Help? IRS and Land Contract Sales (long) - Posted by Stacy (AZ)
Posted by Stacy (AZ) on January 15, 2001 at 16:55:44:
JPiper posted an interesting decision from tax court at the following link:
http://www.creonline.com/wwwboard/messages/5927.html
Then JHyre posted the entire text. As I read the text of the decision, it seemed obvious to me that the main issues revolved around identifying the GIA transactions as “sales”. To quote JPiper (and the court):
"The tax court decided that factors which would be an indication of the benefitis and burdens of ownership include:
- a right to possession
- an obligation to pay taxes, assessments, and charges against the property
- a responsibility to insure the property
- a duty to maintain the condition of the property
- a right to improve the property without the seller?s consent
- bearing the responsibility of loss
- a right to obtain legal title at any time by paying the balance of the full purchase price
All of these factors were present in the contracts for deed used by GIA."
My reply to JPipers post:
"I wonder if we could use the list of factors to fashion a CFD that does not comply with all seven, as did the GIA contracts? For example, you listed the following factors:
- a right to improve the property without the seller?s consent
If specifically stated in the contract that any improvements must be approved by the seller, this one could be eliminated.
- bearing the responsibility of loss
If the underlying Hazard Insurance policy is in the seller’s name, and the buyers only have a contents policy, it seems this one may be eliminated. Also, if the hazard ins. is in the seller’s name, and there is no mention of the buyer being responsible for insuring against loss, this probably eliminates #3:
- a responsibility to insure the property"
I wonder if this would significantly reduce the possibility of the tax court causing problems (only meeting four of the seven indicators)? I would think that identifying the transaction as an outright sale would be impossible, since the the “seller” retains some rights and resposibilities of ownership.
Can anyone offer an opinion on this? It’s important to me (and others), since it may be a way to sell with owner financing, and not be concerned about the IRS categorizing the transaction as a “dealer” sale. This would allow these deals to be taxed only as the installments are made, instead of all in the year of the sale.
Further, in prior research I found that using the accrual method of accounting is another way the tax code interferes with this strategy. My question is, if I ran a business buying houses and selling on Land Contract, but I used the cash method of accounting, would this allow me to avoid the problem of having to declare all profit the year of the transaction?
Am I on to something here, or out in left field?
Stacy