L/O mostly for tax purposes..(long, painful) - Posted by Ben (NJ)

Posted by Ben (NJ) on February 12, 2002 at 09:18:38:

Although I would love to meet everyone, the tax foreclosure niche is so specialized that most of the topics would not really be beneficial to me. If they ever have it in New York, I would definitely stop by for a few drinks. Thanks for asking.

L/O mostly for tax purposes…(long, painful) - Posted by Ben (NJ)

Posted by Ben (NJ) on February 09, 2002 at 14:54:24:

I have never done an l/o before but am considering it for the following scenario. Rather than immediately selling a property acquired through tax foreclosure and incurring a large short-term capital gain, I am considering granting a lease to a tenant with a one-year option to buy. I will then sell it next year and incur long-term capital gains treatment. Should this be structured any differently than a normal l/o? I particularly don’t want it to be challenged as a constructive sale. I know already from this board to keep the lease and option contracts completely separate and distinct. One other caveat, the former owner will have to be evicted. Can I do a lease/option with someone prior to the occupant’s eviction or will the IRS laugh at this? I
just wrapped up a 1031 and would have done another one but my accountant thinks if I do two 1031’s in 2002, I am just
inviting IRS scrutiny. Dam, this stuff can get complicated. My plan was to just sell it quick and not have to deal with evictions, vandalism, taxes and property insurance but if I do that, then I have to suck it up and pay short-term capital gains taxes. Help!

Good point…some other thoughts… - Posted by Ben (NJ)

Posted by Ben (NJ) on February 10, 2002 at 15:04:07:

Let’s say I do decide to just sell the property. I have some stocks that are total dogs, (are there any other kind,lately ?) JDSU comes to mind. I may sell all these dogs, book the short-term losses and then buy them back again in 31 days (wash rule). That way I can get the best of both worlds, I can use the losses to offset the short-term capital gains but I can still catch some upside, if any (as long as the stock doesn’t run away from me within the next 30 days). Another thought, I will have the use of the funds for an entire year so I can invest them very aggressively during that year, therefore it won’t be so painful when I do ultimately pay the taxes knowing that I used the funds (now government money)to maximimize my return. What do you think?

Re: L/O mostly for tax purposes…(long, painful) - Posted by HR

Posted by HR on February 10, 2002 at 13:14:29:


I’ve started doing the same, for the same tax reasons.

Here are some other suggestions to include in your lease option deal:

TB CANNOT exercise before the 13th month. Must lease for a year first. This is not always the case with some lease option contracts, which allow the buyer to buy anytime within a year. Like you, I don’t want them exercising for at least a year.

Make sure you retain the benefits and burden of ownership. For example, make sure your lease says you will pay taxes and insurance. If this were a disguised sale, this would not be the case.

Good luck,


Re: L/O mostly for tax purposes…(long, painful) - Posted by JHyre in Ohio

Posted by JHyre in Ohio on February 10, 2002 at 08:46:12:

A one year option is VERY unlikely to cause the L/O to be treated as a sale. L/O’s are treated as sales when the numbers look like loan amortization…for example, at the end of a 15 or 30 year term of “lease payments”, the option is exercisable for $1, i.e.- the strike price declines over time or the rent credits effectively amortize the loan.

Jonh Hyre

John Hyre please note… - Posted by HR

Posted by HR on February 12, 2002 at 08:06:38:

Hi Ben,

Using losses in various investment groups to offset gains in similar (or dissimilar) investments is certainly a time honored strategy. I suspect John will notice the post and voice his own opinion.

I prefer to make them lease for at least a year, so I’m sure I have at least long-term treatment. Just some thoughts. Good luck.


Ps. Are you going to the convention this year?

Oops, I responded to myself (duh)… - Posted by Ben (NJ)

Posted by Ben (NJ) on February 10, 2002 at 15:44:08:

see the site for my response to your post.