Posted by Steve (CA) on July 18, 2001 at 03:32:06:
I live in Silicon Valley, and am trying to do exactly what you suggested. Stumbled across your post after posting the following:
Bronchick’s course on wraps (‘Cash Cow’) says that you can L/O and then sell with a land contract, although the law is “a little more gray.” Apparently the main grayness has to do with the question of who gets the tax write off. The seller is treating it as rental, the buyer as a primary residence, so if they get audited IRS will obviously disallow one or the other.
Seller would have been paying property taxes and insurance during term of lease, but this would become buyer’s responsibility, right? Whose legal responsibility would it be for the taxes? Is it possible that IRS would view this as the deciding factor in terms of who gets the write off, and that it could become a negotiation point when assembling the deal? Would the seller have to be notified, and informed his tax deduction just vanished?
Let’s say I buy on a lease/option at $450K option price, $20K option money, $2000 rent with 50% credit for 3 years. Sell $450K, $40K down, 8.5% interest, land contract, hefty prepayment before 3 years, at which time contract must be paid off.
Would the fact that, at the time I sold, the property was encumbered beyond what my buyer would owe make it illegal? In other words, after signing with my buyer, he would have to come up with $410K (plus pre-pay penalty) to get the deed, but I would have to come up with $430K. If the pre-pay is $20K or more, would that solve the problem?
Certainly, the land contract with my buyer would have to state that I was not the titled owner, yes?. What would be the most innocuous verbage, and where should it be placed in the contract? Something like “buyer understands that, in the event seller is not owner of record, title may be conveyed via concurrent closings” maybe? Would I type it up and slip it in with the boiler plate, or write something by hand on the contract?