Income Taxes. Implications. - Posted by Rick

import · July 21, 2001, 1:48pm

Posted by Eric C on July 30, 2001 at 11:20:37:

Hi Amy -

That’s great. Please understand that I’m not trying to be vague on purpose.

It’s just that taxes are an important subject and most of us tend to generalize, distort, and delete whenever complicated subjects are discussed.

When I say we generalize, I mean that we tend to make broad comparisons that may not be valid. For example, what tax concerns I have, may or may not impact you at all. It’s important to acknowledge that differences between scenarios, entities, and goals do exist. You will always hear about “rules of thumb” in this and in every other business. Understand that they are “memory shortcuts” designed to make seemingly complicated ideas and techniques easier to understand. In doing so, they often leave out other equally important information. Rules of thumb are great, just know their limitations.

Distortion simply refers to our habit (as human beings) to “twist” the information just a little bit; sometimes a bit too much. We try to make one thing out of another. Be careful here. Make sure that your decicsions are based on sound reasoning and not what you think somebody else is doing.

And deletion is the worst of all. “You never said that” is the mantra of all tenants, L/O’s, sellers, etc. (it’s even be known to appear in the best of relationships from time to time). Sometimes, they phrase it differently; it’s “I didn’t understand that”, or literally, “I didn’t hear that”. All these statements are usually true. They didn’t hear those things because they were mentally deleting as they went along. Ever tried to explain something really complicated to someone else, only to have them fall further and further behind (also known as becoming increasingly confused)because they’re “stuck” on something you said earlier? Think they’ve “listened to a word you said” since then?

The point is this. We all do these things. We can’t help it, but we can begin to understand ourselves a little better.

Your questions are good ones. They just don’t have the quick and simple answers you were hoping for. That shouldn’t stop you from searching.

Take care,

Eric C

import · July 21, 2001, 1:48pm

Income Taxes. Implications. - Posted by Rick

Posted by Rick on July 21, 2001 at 13:48:10:

There was a recent post concerning income taxes that was not addressed. Seeing as this could be a stumbling block I thought I would ask it again and get specifics.

Is it true that income taxes have to be paid on the full amount of a sale for even an installment type loan?

Where is this money suppose to come from?

Example buy mobile home for $3500. Sell the mobile home on contract for 7000. 12% at 48 = $184.34

Let’s say you close the deal in December of this year. You have a income tax rate of 20%. 20% of $3500 is $700. 20% of $7000 is $1400. You total sale would depend on if you whether you had cash to buy the MH or borrowed on it. Or do you have to pay on the full amount of the loan. 8848.32. 20% of that is 1769.66.

If I finance my monthly payment spread over the same amount of time my payment is 92.15. That means it would take over 8 months to pay off my income tax bill if I am only taxed on $3500. 16 months if I am taxed on the $7000. And more if I am taxed on the full loan payments. I only have 4 payments from the buyer.

Either way, I will have a large tax bill that I probably will not be able to handle starting with limited funds in the first place.

I would have to revert doing all cash deals until I could generate a fund to pay income taxes without having to take a loan out on tax day.

I would like for the experts here to address this issue. It seems to be it is a very important issue that needs full explanation.

Thanks.
Rick

import · July 23, 2001, 12:36pm

Re: Income Taxes. Implications. - Posted by Rick

Posted by Rick on July 23, 2001 at 12:36:04:

I just wanted to thank everyone for there input in this discussion. I went back and read some earlier posts about taxes and have a little better understanding of things. I think the best advice that can be given is to seek the help of a tax expert that can explain things fully. This will help to keep from getting a big tax bit that may not be expected. And make sure and use the “accrual method of account” as opposed to the “cash method”. Check previous posts on income tax and MHs for an explanation of both.

Rick

import · July 23, 2001, 6:53am

Re: Income Taxes. Implications. - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on July 23, 2001 at 06:53:42:

OK, I will make a try at this, but I am not a tax expert, and I would hope that John Hyre would pipe in soon.

I am slightly confused as to what you mean by an “installment type loan”, but let’s see if we can clear the air. To me, an installment loan is just a loan (car, mobile home, appliances) that the buyer pays in installments. An installment type sale is where the seller is willing to take his profit in small pieces, like a lease-option or a land contract. The seller retains title to the property being sold until the property is fully paid for.

On the typical Lonnie deal that you mention, you buy the home for $3500, and sell it for $7000. I would HOPE that you get a substantial down payment and are NOT financing the entire $7000. But in your example, you did finance the whole amount for 12%, 48 months with a payment of $184.34. Now on a typical sale, you sold the home for $3500 more than you paid for it. Therefore the $3500 is profit and considered taxable in the year that you made the sale. Doesn’t matter whether you sold it in January 2000, or December 2000, that income is considered to be earned in 2000. So your tax liability at that point is 20% of the $3500 profit, or $700. In addition to that amount, a certain part of the monthly payment that the buyer makes to you is interest. That portion is also considered income and is taxed. As is true of most loans, the portion of each payment that is interest will decrease until the loan is paid out. For the first payment your buyer makes to you, $114.34 is principal and $70.00 is interest. So now you owe taxes on the additional $70.00, or $14 more in taxes at 20%.

One way to get around paying all of these taxes is to use an installment type sale. To make an installment type sale more credible, you would have to hold title in the mobile home until it is paid off. With a typical Lonnie deal, you transfer title to the MH buyer, and you are just the bank. You physically retain the title paper, but you are the lien holder, not the owner. Remember, if you remain the owner on the title, you have the liability associated with the mobile home. If someone gets hurt, you are the owner, and you will get sued. The typical installment sale would involve you being the owner of the home, and doing a rent-to-own type sale or a land contract. Using this method, you spread the tax liability out over the term of the agreement. You pay tax on the profit as you receive it. I am not sure on how the proportion of the payment is calculated to be profit. On your $7000 sale, since you paid $3500, and you profited $3500, I would think that half of each payment is considered profit and taxable? So for each payment of $184.34, $92.17 is considered profit and taxable in the year it was received. So if your tax rate was 20%, you would incur $18.43 in taxes for each payment received, or $221.16 per year.

Does this clear it up any? John Hyre, please correct me if I am wrong.

import · July 22, 2001, 8:30pm

Re: Income Taxes. Implications. - Posted by Blane (MI)

Posted by Blane (MI) on July 22, 2001 at 20:30:51:

Rick,

You would pay tax on your profit which was $3500, plus on whatever interest income you earned during that time.

I can give you more detail on how I handle the transaction to defer taxes, but right now I’m out in the boonies with a cold beer on a warm night. So if you want to email me privately I’d be happy to explain in more detail.

Blane (chillin’out in west MI)

import · July 21, 2001, 3:32pm

Re: Income Tax Implications - Posted by Chuck (AZ)

Posted by Chuck (AZ) on July 21, 2001 at 15:32:47:

I can tell you how I handle this, others may do it differently.

Nevada-based LLP or LLC. Nevada has no personal income tax.

In 2000 (for the 1999 return), I recieved a total (all sources) personal refund of just over $5,200

And that’s all I’ll say about it.

import · July 28, 2001, 1:50pm

Re: Income Taxes. Implications. - Posted by John (MI)

Posted by John (MI) on July 28, 2001 at 13:50:36:

I would be interested to know how you handle the transaction to defer tax. Please, email me. I am looking to get started in mobile homes and see the tax issue as a hurdle.

Also, if you are a licensed dealer in MI, do you have a lot? I know that one of the requirements is to have a lot. I am interested in how you handle issue.

I am in the UP. Appreciate any info you can share.

John

import · July 22, 2001, 10:06pm

Blane(MI)…please read this post!! - Posted by Kevin in OK

Posted by Kevin in OK on July 22, 2001 at 22:06:43:

After Rick restated my income tax question posted a couple of days ago, you generously said if he would email you privately you would give further info. I too would like to read your additional thoughts, and I’m wondering if you would either email them to me as well, or post them here for the benefit of all.

Thanks in advance, Kevin in OK

import · July 21, 2001, 3:54pm

Re: Income Tax Implications - Posted by Rick

Posted by Rick on July 21, 2001 at 15:54:27:

Thanks for the info.

I am interested in Texas. I wonder. Was the person mentioning State Income Tax of Federal Income Tax. Texas has no State Income Tax either.

Does this problem only apply to State Income Tax or Federal Income Tax as well?

import · July 24, 2001, 11:57am

Hey! - Posted by Jeremy in OK

Posted by Jeremy in OK on July 24, 2001 at 11:57:40:

Kevin,

Just another okie here! I have read Deals on Wheels and I’m still learning. Just wanted to let you know
there are others, like myself here in Oklahoma that
are learning about mobiles. Where are you at in OK?
I like sharing perspectives with others, which helps
speed the learning process. Take it easy!

Your friend in OK
Jeremy

import · July 21, 2001, 5:05pm

Re: Income Tax Implications - Posted by Eric C

Posted by Eric C on July 21, 2001 at 17:05:24:

Hi Rick -

There have been several threads on the taxation of income generated by “Lonnie Deals”. And there are almost as many “opinions” as there are posters.

You may want to do a search on “JHyre”, who happens to be a tax attorney and understands RE, MHs and paper. (read that to mean he does Lonnie deals himself).

Personally, I don’t use Nevada entities any longer, but each person’s situation is different.

Yours,

Eric C

PS - I know the issue of taxes is important, but don’t overstate the case either. For years, I didn’t make as much money as I could because I didn’t wish to incur more taxes. That was a mistake. Don’t do that. The simple fact is that if you are making good money, you will pay taxes. Learn to limit them as prudently as possible but keep in mind the law of diminishing returns.

import · July 26, 2001, 1:58pm

Re: Income Tax Implications - Posted by Amy VA

Posted by Amy VA on July 26, 2001 at 13:58:09:

Eric C,
I am interested to know why you no longer use a Nevada entity. I am doing research on LLC’s, and looking at doing one through Laughlin and Associates in Nevada. Have you (or anyone else) done business with them?

Also,(forgive my ignorance), what do you mean by “the law of diminishing returns”?

Thanks,

Amy VA

import · July 27, 2001, 6:59pm

Re: Income Tax Implications - Posted by Eric C

Posted by Eric C on July 27, 2001 at 18:59:31:

Hi Amy -

There are several reasons that I no longer use the Nevada entities – most of which I don’t feel comfortable discussing over the net. It’s just too complicated – you would want to ask specific questions (as you should) and I would want to answer them; this just isn’t the place. Maybe one of the conferences?

In any case, the choice is both more important and less important than many would have you believe. The correct answer, as with so many things in the RE biz, is – it depends. On who you are, on your level of sophistication, on your investment choices, etc., etc.

Forming addtional entities is not a panacea. Don’t confuse movement with achievement.

And in making mention of the “law of diminishing returns”, I was merely acknowledging that most of the savings you will get with any strategy (or combination thereof)will occur with relative ease. Succeeding dollars saved will cost you more in aggravation, research, advisory fees, possible audits,etc. Simply put, a target of zero taxes may not (and often is not)be a goal worthy of your effort. Reduce your taxes as much as it is practical, but be aware that at some point you are no longer getting the “bang for your buck” that you were earlier. Each dollar of savings now costs you more and it’s at this point you realize that simply choosing to make more money is often the wiser course.

Yours,

Eric C

import · July 30, 2001, 9:43am

Re: Income Tax Implications - Posted by Amy VA

Posted by Amy VA on July 30, 2001 at 09:43:54:

Thanks Eric C. I am just beginning, so all info is thought provoking for me! I will try to be more specific with my question from now on.