How can I make this work? Any ideas? - Posted by VJ

import · January 26, 2010, 1:29pm

Posted by Edwin on June 11, 2010 at 01:16:47:

VJ, I see your question is from January, but I’ll take a stab at it. First, I think your plan is overly complicated. What’s the point in putting title into a trust, then having a corporation buy the interest? Why not just buy the properties outright? Secondly, the depreciation might help, but the write off on the negative cash flow is only going to make it a bit less painful. For example, if your friend’s business earns $100,000 in a year, but is offset by the negative cash flow on the properties of, say, $50,000, that results in a net gain of $50,000 instead of $100,000. Why would you twiddle away $50,000 just to save, perhaps, $20,000 in taxes? Don’t make sense.

import · January 26, 2010, 1:29pm

Posted by VJ on January 26, 2010 at 14:29:53:

Greetings all…

I posted this question in the main forum, but I think it may have been off topic there. Sorry if it was, and sorry about the double post. I don’t make a habit of it.

I’m in the process of working out a way to deal with two California properties with substantial devaluations and hefty negative cash flows.

I have an idea that I think will work, and I wanted to get your feedback on it. I’ve used this idea before with success, but never on this scale and in this particular way.

The two subject properties were acquired back in 2005, just before the southern California real estate market went pear-shaped.

The properties are both located in a private “horse ranch” communtiy and are both very, very high-end.

At the time, in 2005, both these properties were the “ugliest houses” on the block, which gave them huge upside potential as “fixers.”

They were purchased at a discount, fixed up, and placed back on the market… at the EXACT time that the market began to tank. So they didn’t sell when placed on the market, and the value dropped so rapidly, they were upside down in a matter of just a few months, which made “taking a lower offer” impossible. And so, the seller rented them out and watched in horror as their value plummeted…

In 2005, the properties were valued at just over one and a half million dollars per property. Today, one is valued at just over 200k and the other, just over 300k. The loans on both are in excess of 600k each. Construction costs on both are in excess of 100k each. You can see how there needs to be some creativity here to turn lemons into lemonade.

Here’s what I’m proposing my friend do with these (I think lease option would be out of the question here, which is why it’s not mentioned as an option):

My friend (the seller) has a very successful company that is constantly looking for tax breaks to offset the income each year. I recommended these properties as prime candidates to give his company yet another way to cut taxes.

Since both properties are now owned by him as an individual, I have suggested he convey these problem properties into a trust, and then, have beneficial interest in the trust transferred to the corporation. The corporation could then claim the negative cashflows and the depreciation, along with the monthly negative cash flows and other expenses, as a write-off. The properties could be used as vacation destinations for the employees and customers of the corporation, and maintained for that purpose.

This could go on until the market turns around in Southern California, and at that time, beneficial interest could then be transferred back to the seller, or to the corporate retirement fund as an appreciating asset.

With some creative accounting, I think there are several ways these properties could provide huge tax shelters for the corporation.

I have NO IDEA how to make all this work, but I’m certain there is a way.

Any thoughts?

Thanks in advance.

VJ