Tax liability on repair credits?? - Posted by John

Posted by JHyre in Ohio on February 21, 2002 at 17:58:04:

I’m in Findlay and take clients for tax & asset protection issues…I generally do not do RE contracts, closings, etc…you’d need someone local for that anyway.

Your repair money is taxable income to the recipient entity (cash received), but any repairs that you spend the money on is deductible for that entity or capitalized (and possibly depreciated), depending on what you spend the repair money on. If you pay the repair company to do the work, that is also income to the repair company, less deductions for materials, etc.

In the future, I’d have the repair money paid directly to your repair company by the seller…you then have a good argument for no income to the buying company, only to the repair company. This should produce a better and simpler result, because giving the payments to your buying company causes income, but may result in deductions WAY down the road…paying the repair company directly may avoid that timing mismatch.

John Hyre

Tax liability on repair credits?? - Posted by John

Posted by John on February 17, 2002 at 13:17:02:

Perhaps this is too specific and I should consult with my tax advisor but I figured I could get some input from a thread here.

I am wondering about the tax liability on repair credits.

Specifically, if you own a construction company (specifically an S-Corp)and borrow $10,000 from that company as a downpayment or money needed to close a deal, and then that company gets $10,000 from the seller’s proceeds to perform repairs to the property after it has closed, does that company have to pay tax on that $10,000 or is it a net of $0 on the books? Consider that the company will not get the $10,000 back from me for a very long, long, time, at least not on “this” years tax return.

I guess it depends on whether a “loan” from a company is considered a disbursement for that company. If it is than it is a nobrainer, i.e. the net gain on the books would be $0. If it isn’t, can a claim be made that the construction company was simply repaid the $10,000 through closing and that the work will be performed at no cost or is this considered laundering. It seems absurd to me that I put my own money into a deal and then my company receives that money back and then I have to pay some large chunk of it to taxes. Any way around this? I have done a couple of deals where I borrowed the money from the construction company and had the construction company paid through sellers proceeds for repairs to be done on the property. There has to be a way to not pay taxes on money that was originally yours but I don’t want any trouble with tax fraud.

Re: Tax liability on repair credits?? - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 19, 2002 at 06:39:39:

How much did you buy the property for and what was your medium of payment (e.g.- cash, subject-to, etc.)?

John Hyre

Re: Tax liability on repair credits?? - Posted by John

Posted by John on February 19, 2002 at 12:31:27:

First things first, are you in the Cleveland area? If so, are you open to new clients? If not, do you know any good RE attorneys in the Cleveland area? I have had no luck finding any that were tuned in to anything non-conventional. That really makes it hard for me. I plan on picking up a few of the courses in this section but I still need a good attorney that can steer me the right way in setting the deals up to keep me out of trouble and limit my tax liability.

As far as the deals already done, I did six this way. I only have eight properties in all, 2 bought totally conventionally and the other six like the following example. I have the money to cover the worst case tax liability but I hate to give it up if it can be avoided. The creative deals were all conventional loans, 10% down. One of them for example was puchase price of $106,000 where I put up 10% downpayment and closing costs roughly about $10,000 after prorations and RE tax credits, and my construction company recieved a check from sellers proceeds for roughly $10,000 for repairs to be performed. I’ve done all the repairs and only have about $2000 in it not including my own time. I have no employees and do all the work myself on the side. The company had about $25,000 in a business checking to start and it’s been money-in/money-out for a while now. I have all of the figures. I am going to see my accountant on Monday but I wanted to have an idea of a strategy and I would rather sit down with a knowledgable attorney who knows what I’m trying to accomplish than just go see my tax advisor. I did not have an accountant or attorney set up the vehicle for my construction company which is an S-Corp. An attorney friend at work basically walked me through the couple forms and said that was it. I’m wishing I would have consulted with an attorney at the time to put together more of a strategy at the time.

Any info or leads to a good attorney would be great. I’m actually hoping you are in the Cleveland area and have room for one more client.
Thanks again in advance.