I’m far from an expert, but just browsed across this to see if I’ve learned anything. I too am confused by your explanation…you appear to be describing a land trust, but then follow that up with terms indicative of a lease/option. I think you would be well advised to do some more studying on this to establish not only what kind of deal you are getting, but how good of a deal it is?? Real estate is a great way to make money and a great way to get fleeced.
In either case, however, the selling price should be established up front, and any amount between there and the sellers basis are his tax burden as best I see it…again, I’m only a few years in this.
Regarding how long the unit is rented, versus owner occupied, also is his problem if indeed it is a lease option. If it is a land contract, I think the clock starts clicking over again when title changes to you
HEY,
I am in the middle of a negotiation for a lease option purchase and I came across an issue that could end the deal. This is whats happening, the property will be signed over to me via “Land Trust” and all payments and responsibilities are put on me. I then am then going to make it an owner occupied rental and I have the option to buy the house from that seller in 3 years. The problem is that the seller that is giving me the option to purchase in three years has been renting it out for 9 months thus far. After 2 years of renting a house out, when it comes down to selling, the seller is now burdened with capital gains tax. I wanted to know what I could do to eliminate this problem. PLEASE HELP!
Posted by dealmaker on April 08, 2005 at 09:22:46:
OK, I’ve re-read the post a fourth time and I’m still not getting something.
How are you going to make it an “owner occupied rental”? If it’s owner occupied, it’s not, by definition, a rental. Please explain.
A house doesn’t become liable for “cap gains” tax after 2 years of rental, it’s 3 years. Actually it must be owner occupied for 2 of the previous 5 years to get the exemption. So technically you could close 2 years and 3 months from now and he’d be OK. How much gain is this guy likely to have gotten over that time frame? Is his tax hit, if you don’t close in the next 27 months going to be huge? Maybe you could explain the tax code, or better still have him talk to a CPA, to get correct information. Self help tax planning is like self-help dentistry, too much pain for too little savings.
By “land trust” it sounds like you’re doing a contract fo deed. Is that what this is? I would NEVER do a CFD although there are those who think they’re the best thing going.
Thanks for this response! By owner occupied I mean it is a SFH and I will be living in it as well as having a few other people paying rent for living there with me. The seller will be making at the least 50 K more than if he would sell right now. The deal simply is that he trust everything over to me and within the next 3 years I’d have the option to buy it but i’m not obligated too. HE IS STILL THE OWNER.
So I guess now my question is this: If property, insurance, mortgage, etc. is trusted over to me for the next 3 years and I am living in the house and having the people living w/ me pay rent to me, would capital gains tax kick in after three years when the owner sells this house?
Also do all tax benifits stay with him when he trust the property to me?