Posted by mark on October 18, 2004 at 23:34:38:
thank you mr. tew as well as everyone else for your responses to my inquiries…seems like they will be most helpful…
—just trying to get started on the right foot so i’m not shooting myself in the left foot…lol.
thanks again
mark (tx)
capital gains - Posted by mark
Posted by mark on October 15, 2004 at 23:52:02:
hey guys,
i just got finished ready dow and mmwmh. i am very stoked about getting started, but before i did i wanted some tax advice. i went to see my cpa today and explained to him how the books suggest setting up the deals. he told me that is sounds like a very good oportunity with two exeptions. first since i am purchasing with the intent to flip the property and of course carry a note i will be for IRS puposes listed as a dealer (which is also the liscence you have to get in texas) which would put a self employment tax of 15% on the profit i recieve on the sale in addition to the capital gains liability of whatever tax bracket i happen to be in, for simplicity sake lets say 30%. so my total tax liability on each deal will be 45%, due on the year of the sale… so my question is i guess how is everyone handling this. by my calculations if you buy for 2000 and sell for 5 or 6k then you are looking at total out of pocket at around 4500 the first year… do these numbers make sense to anyone… any way this is my only speed bump left before i jump in with both feet, any help anyone can give will be greatly appreciated. by the way my cpa deals with investors that deal with sfr’s all the way up to multi-family units… has as of yet had a client that does quick flips, but the above was his understanding of the tax laws.
again thanks.
mark
Re: capital gains - Posted by Sterling
Posted by Sterling on October 19, 2004 at 16:15:58:
Federal Income Tax = 28%
Ohio Income Tax = 5.3%
City Income Tax = 1.75%
School District Income Tax = 1.0%
Self Employment Tax = 15.3%
Total : 51.35%
Seems to me the ideal situation would be to sell the note ASAP.
Consider:
Purchase Price = $2500
Sale Price = $5000
Profit = $2500
Tax Due = 51.35% of 2500 =$1283.75
Down Payment = $500
In-the-deal = $2000
36 payment of $151.08
Yield = 82%
If you pay the tax your first year costs are $3283.75. If the deal takes
place in the middle of the year you may collect say 6 payments totaling
$906.36 you have $2377.39 NEGATIVE cash flow the first year.
However, suppose you collect one payment and then sell the note for
$3396.73, $1000 less than it’s face value after one payment. The note
buyer gets a yield of 32%. Good enough for some people.
However you have invested $2500 and received $500 down + one
payment of 151.08 + $3396.73 = $4047.81, Your profit is now
$1547.81 so your tax bite is reduced to $794.80. After paying the tax
you are left with $753.01 profit and $3253.01 money in fist for your
next.
But the really good news is (if all my math is right) that if your money
is out of circulation for only two monlhs then your yield is a whopping
327%
Re: capital gains - Posted by Ernest Tew
Posted by Ernest Tew on October 18, 2004 at 06:41:09:
Usually, when mobile homes are bought for the purpose of reselling at a profit, the seller is considered to be a ?dealer.? Mobile home dealers are required to pay income taxes on the entire profit in the year of sale. There is no “magic number” that makes you a dealer?just one sale can be a dealer sale if the necessary intent is present.
This could turn into a serious tax problem for those who buy and sell a large number of mobile homes. Reporting the total profit on each home in the year of sale while collecting it over a period of several years could take more than the down payments just to pay the taxes.
A lease with an option to buy can eliminate the problem because the home isn?t actually sold until the option is exercised. For the same reason, we don?t have to worry about installment reporting and the IRS dealer issues. As the owner of rental property, we can take depreciation deductions to offset some of the rental income. We have found this to be the best way to market mobile homes.
Careful documentation is extremely important. Regardless of what we call the transaction, if it ?too closely resembles a sale,? it could be treated as a sale by the IRS and taxed accordingly. Factors that the IRS consider include: (1) whether the lessee acquires title after making a certain number of payments; (2) whether the lessee is given credit for a portion of each lease payment; (3) whether the rental payments materially exceed the fair market value of the property; and (4) if the option price at the end of the lease is nominal in relation to the value.
The Net Lease and Option forms that we use are designed to meet all the requirements and solve these problems. They are on the computer disk that is included with the manual, ?How To Get Rich Helping Others.?
THANKS GUYS - Posted by mark
Posted by mark on October 16, 2004 at 23:19:56:
hey guys,
just got in from my “yob”, awesome advice, will definitely get the book by mr Tew, and will have some more info to discuss with my cpa on how to structure the deals to “defer” the taxation liability, you know it seems to me that about 200 yrs ago america had a party to say that we were paying too much in taxes… boston tea party…how in the world did we let ourselves get back into that situation? oh well use what ya got to make the best of a situation.
again thanks for all the responses seems like some sound advice, will let ya’ll know if my cpa has some other “questions” about said subject.
thanks again,
mark (newbie in training) LOL
Re: capital gains - Posted by John M.
Posted by John M. on October 16, 2004 at 22:49:35:
But Guys, I’ve bought lots of cars, which have the same kind of title, and resold them. I never ran to the IRS and told them I made $1000 selling a car! Why should I have to when I sell a mobile? I don’t wanna tell 'em! (I know, I know, I’ll get caught, so I’ll probably claim all of it.)
Re: capital gains - Posted by jowns
Posted by jowns on October 16, 2004 at 15:40:07:
what about liability ins on lease options . if the people let their ins. run out wouldnt i be responcible for injuries etc.
Re: capital gains - Posted by Ernest Tew
Posted by Ernest Tew on October 16, 2004 at 07:37:48:
Mark,
Greg Mead and your accountant are correct in saying that all the profit is taxable in the year of sale because, in the eyes of the IRS, you are a dealer when you flip property.
You can avoid the problem by entering into a net lease with an option to buy–but, it must be done correctly.
If you would like to receive a copy of the Net Lease and Option forms that we use, send me an email.
Been there, done that, didn’t dig it… - Posted by Greg Meade
Posted by Greg Meade on October 16, 2004 at 06:42:41:
at all. Last year had to sell a complete note to help me pay a 72K tax bill. Did five L/H and financed balances. Did fine til tax time…and the scenario you describe kicks in. Had only gotten 2 payments on one yet the complete profit tax was due at once.
The solution is found in Ernest Tew’s book How To Get Rich Helping Others. I like to sell everything (and buy) in a Lease Option or as Ernest so aptly names them triple net leases. The sale is treated as a rental (regular income tax after expenses) until option is excersised which is usually a very low number!
87% of my income is derived from Real estate and mobiles, so the IRS will treat me as a dealer for Social Security Taxes whatever I do…that is the cost of doing business in America.
Mark, Ernest’s book is worth the 80 bucks it costs. There are forms you can use and some great advice. The fear is if the L/o looks like a sale, it is treated by the IRS as a sale with out much recourse. There are some legal steps you can take to skirt this issue! If you have questions contact Ernest At ErnestTew@aol.com…he returns all calls promptly. Go do that first deal Mark…you are embarking on a very cool (profitable) adventure!
Greg
Re: capital gains, Earnest goes deep! - Posted by Dan Auito
Posted by Dan Auito on October 18, 2004 at 12:39:47:
Earnest you have a way of putting things that bring many considerations to mind, thanks for these insights, they have deeper meanings for some. Dan Auito
Re: capital gains - Posted by Eli
Posted by Eli on October 18, 2004 at 19:19:01:
you have a point here. I believe that one day in School I was reading that boring tax code stuff and I saw something that says you can sell up to 2 cars a year for something like a $10,000 profit and you dont have to report it. I could be totally wrong here but I am pretty sure I read that because I have always been good at buying and selling things and I figured I could buy a car cheap and drive it around till I sold it and I would not have to pay tax as long as I only did it twice a year. I didnt end up doing it, because I found other better ways, but nonetheless…
There has got to be someone out there that has more knowledge on this one, Please post.
Man!!! I just re-read my post and I think I should have been paying more attention in English instead of trying to figure out how to keep my hard earned dollars out of ol’ Sam’s pocket. Talk about a run on sentance!
Re: capital gains - Posted by JP(SC)
Posted by JP(SC) on October 16, 2004 at 08:34:13:
How about if you sell the note at a discount to another entity you control? Wouldn’t the first entity (dealer) only be taxed on it’s net gain from the whole transaction and then the second entity could be taxed over time on the interest income from the note. Would this work to avoid huge first year taxes?
Re: Been there, done that, didn’t dig it… - Posted by Tarheel T
Posted by Tarheel T on October 16, 2004 at 14:42:58:
If I understand the net lease with option correctly as Mr. Tew does it, the strike price of the option decreases or amortizes and at the end of the option period there is only say a dollar owing on the option strike price. Is that correct?
TT
Re: capital gains - Posted by Ernest Tew
Posted by Ernest Tew on October 18, 2004 at 06:34:11:
Yes, having the dealer entity sell its receivable at a discount and keeping little or no profit could work. However, when both entities are owned and controlled by the same people, it could become a problem if it isn’t documented exactly right. You may want to talk to a CPA about how it might be done.
No, that is not correct! - Posted by Ernest Tew
Posted by Ernest Tew on October 18, 2004 at 16:36:32:
One of the important requirements is that the option price must be “meaningful.” Another is that the monthly payments are treated as rent–and not as interest and principal. If either or both of these ingredients is present and you get audited, the IRS would claim the transaction to be a sale.
The solution is in our Option form. About half way through the term of the lease (finance period), the customer has one year within which to exercise the option. For example, if you agree to finance the home for ten years, the option can be exercised after 5 years and prior to 6 years. We determine what the balance would have been had the customer given us a note. That figure, rounded to the nearest $50, then becomes the option price.
No where in the documents is the original price mentioned.
The IRS has some pretty strict rules… - Posted by Greg Meade
Posted by Greg Meade on October 16, 2004 at 15:57:43:
my accountant warns that if it looks like sale, pays out like a sale, it is a sale. We leave approx. 1/4 of price as option after x amount of lease payments paid timely.
Anything is better than paying tax in advance of payment!
Greg
Re: capital gains - Posted by Sterling
Posted by Sterling on October 19, 2004 at 11:34:37:
Would not the second entity be immediately taxed on the difference
between the face value of the note and the discounted price, thus
making which owns the note a moot point? I seem to recall reading
something of this nature on this very forum.
Re: No, that is not correct! - Posted by Tarheel T
Posted by Tarheel T on October 18, 2004 at 19:33:49:
Thanks for the clarification.
Do you generally offer to provide the financing for these people when they exercise their options?
Even a few years - Posted by Philip
Posted by Philip on October 16, 2004 at 17:25:57:
of payments, a small reduction of the sales price, and a small delay makes a huge difference.
I have done triple net leases with a few land home deals; with just 2 years before the option is exercised, and it allows cash flow in before tax flows out. Plus it reduces the final sales price.
80% of the original price may still be due, but it is only partial profit and interest and the rest is recapture of principal.
So the tax burden is delayed, lowered, and just generally a softening of the blow…even without it being paid down to 1/4.
It REALLY helped the first tax year and I am gratefull of Ernest’s advice.
Philip
Re: No, that is not correct! - Posted by Ernest Tew
Posted by Ernest Tew on October 18, 2004 at 19:37:47:
Yes, the option agreement provides that they have a choice of either paying the price in cash or financing it for the remainder to the term of the lease.