Posted by JHyre in Ohio on September 08, 2002 at 10:51:56:
The tax laws will reclassify an L/O that is in substance a sale and loan. The fact the pieces of paper are separate does not chenge the substance of the transaction as a whole - it merely reduces your chances of getting caught for TAX purposes. What you are doing makes sense from a non-tax standpoint, and I’d keep right on doing it. You can report for IRS purposes as a sale or as a lease followed by a sale - whichever suits you best. There is some chance that if you report as lease, the IRS might disagree, but that should not affect what you are doing for purposes of local NON-TAX law.
Cash method and L/O deals - Posted by Marc Donovan
Posted by Marc Donovan on September 03, 2002 at 19:32:29:
John,
You replied to one of my earlier posts that as a “Tew Dealer,” (are we using that term yet?) I need to account for a lease option as if it were a sale. You mentioned a Supreme Court decision, but gave no details. You also mentioned something about cash basis, reducing the profit to fair market value of the note. So the question is, how do I compute my accounting as a cash basis Tew Dealer? (I’m probably misquoting you, so pardon if I am)
Do I figure it as if every rental payment were really a note payment? Ex: house sells on L/O for 24 months, option is 5000, 14%, 200/month, lease is 200/mo, so this is really a note for 200/month @ 14% where balance in 24 months is 5000, so face value of “note” = $7950. Then using cash basis, the FMV of this “note” is 45% on an old home, so my gross is 3577?
Or am I way off here?
Plus, is this rental income treated as SE income or passive rental income? (I spend over 500 hours per year on this biz, but I have a real JOB that I would love to be able to deduct a loss from)
I know I should be paying a CPA for this info, but I doubt I could find one that would not be guessing… so send me a bill – really.
BTW, I would love to do these deals in a true Lonnie style, but in sunny FL, I would be paying 7% sales tax for every sale (my tenants usually have $500 max, and that goes to the park), and I would have to pay 1000 min and 3+ months to foreclose. Eviction typically takes 2 weeks and $200.
Re: Cash method and L/O deals - Posted by JHyre in Ohio
Posted by JHyre in Ohio on September 04, 2002 at 04:29:36:
Assuming that your L/O deals are properly treated as notes in fact for tax purposes, you are right on the mark…you’d impute an interest rate to the payments (you have a lot of fexibility there) and back into interest & principal payments…then apply the cash method. The interest should be portfolio income, the remaining profit/loss ordinary in nature…because you are not dealing with “rents” for tax purposes.
Posted by Marc Donovan on September 05, 2002 at 20:20:17:
I’m not sure what you mean by “Assuming that your L/O deals are properly treated as notes in fact for tax purposes, you are right on the mark.” Plus Bill’s article “The Lease Option vs. The Contract for Deed” says “Furthermore, the IRS does not classify a lease option as a sale until the option is exercised (see, Tax Court Memorandum 1999-11.).” So what is required to have my L/O deals considered sales for tax purposes?
Posted by JHyre in Ohio on September 06, 2002 at 08:02:44:
If an L/O looks like a financing, it will be treated as one. For example, if the lease payments involve credits towards the option that exactly match what the principal would be on an amorizing loan, you have a sale and loan, not an L/O, for tax purposes. Most cases aren’t that clear cut!
Posted by Steve W (WA) on September 08, 2002 at 10:12:07:
Since the lease and the option are separate docs, and neither references the other, and NOTHING references a total “sales” price (that which the property would fetch before any lease time), how can this be?
For instance, (now admittedly, I am L/O’ing in the dark) - unwritten sales price on a MH is 6500. Buyer wants to L/O - so I give them a year lease, and they purchase an option that is exercisable after a year, for a price that is less than my original asking (credit given for rent paid, but that is not written anywhere) - where is the catch that gets me? ESPECIALLY with old MHs - value? in the eye of the beholder only - AV is $800, but I can sell for 6.5K or 2.5K - who’s to question the sales price?
I do have ETs MH course, but L/O’ing is not very step-by-stepped - feeling my way along here, and probably not the right way.
The scenario is thus: the state will pay X amount to get someone in a home, but only a rental - an amount that covers downpayment (option) and first month or two of rent. They care not if it is a rent-to-own situation, but they will not cut a check for a straight purchase. So I draft a lease for a year, and an option agreement with the T/B. The state $$ covers “deposit and first month’s rent”, and the deposit converts to option consideration at the completion of the lease. This gets the T/B in, (against the premise of a painful down to instill ownership - I know I know!) and they just have to pick up the rent after first month.
Blatant outlaw? Flawed logic? I just want to do this easily, get the money, and be legal, if all three of those are possible.