Tax question for Seller in L/O - Posted by NeilF

import · April 16, 2002, 8:33am

Posted by NeilF on April 16, 2002 at 09:58:42:

Great idea, if he goes for it I’ll send you half. :>)

import · April 16, 2002, 8:33am

Posted by NeilF on April 16, 2002 at 08:33:19:

I am working on a Lease/Option with a seller. He is concerned that the money I pay him will be considered rental income and will complicate his earnings and tax filing procedures.

If I pay him exactly what his mortgage is or even a little extra how will that payment be categorized?

Will is tax filing procedure be different then what he is doing now with his simple mortgage deduction?

Thanks for your help.

import · April 16, 2002, 9:49am

Re: Tax question for Seller in L/O - Posted by Brent_IL

Posted by Brent_IL on April 16, 2002 at 09:49:36:

Depreciation will cover around 30% of rental income with a land value of about 20% of sales price.

What if instead of a L/O, you got him to participate in an equity-share. Re-fi beforehand to get any cash he needs. You could play with the allocations so he would receive income close to the deductible expenses the he would be responsible for paying. Good ROI for him; good cash flow for you and your buyer.

import · April 16, 2002, 9:16am

Re: Tax question for Seller in L/O - Posted by Mike Daly (GA)

Posted by Mike Daly (GA) on April 16, 2002 at 09:16:02:

It would count as rental income on an L/O and make his tax return a bit more complicated – but you can also point out he gets the tax benefit of taking depreciation in addition to deducting his mortgage interest.

It’s really not that complicated – a decent tax preparer or tax software can handle this for him easily.

import · April 16, 2002, 10:01am

Re: Tax question for Seller in L/O - Posted by NeilF

Posted by NeilF on April 16, 2002 at 10:01:50:

I do believe he has re-fi’d all he can and built his retirement home from it - paying it in full. Would this make sense still? Thanks.

import · April 16, 2002, 9:26am

Re: Tax question for Seller in L/O - Posted by NeilF

Posted by NeilF on April 16, 2002 at 09:26:43:

Thanks for your help. So the Rental income may be offset by the depreciation - are they close?

import · April 17, 2002, 1:09am

Re: Tax question for Seller in L/O - Posted by Brent_IL

Posted by Brent_IL on April 17, 2002 at 01:09:20:

Sure. You can set it up to pay him his percentage of fair rent less a “long-term ‘good’ tenant” discount of 20%. Assign the payments for insurance, property taxes, and anything else that the occupier, or sub-occupier can not deduct to the non-occupying party. He should have little taxable income remaining. You would keep the interest deductions. He gets an excellent return when you cash out and, in the meantime, your L/O buyer is paying for his retirement home.

import · April 16, 2002, 9:39am

Re: Tax question for Seller in L/O - Posted by Mike Daly (GA)

Posted by Mike Daly (GA) on April 16, 2002 at 09:39:42:

The depreciation helps some but I wouldn’t say it cancels out the rental income. But with his mortgage deduction they should probably balance out. If he’s that concerned about having to report rental income then he could rent it to you for nothing, LOL.