Posted by randyOH on February 14, 2010 at 10:39:47:
Yes, I think you are probably right. The only question might be how many of his tenants actually exercise their options and buy the house. Based on my experience with LOs, it is probably less than 10%. If the percentage is very low, he might be able to argue that he is in the rental business as opposed to the sales business. But, if the percentage is high, then you would definitely be right that he is in the sales business.
I did roughly about 12 sandwich lease/options where I lease/optioned with the seller, then lease/optioned to my tenant buyer. I have it set up where I simply collect the funds from the tenant/buyer, deposit into my account, then send a check to the seller. (I make sure to call the lender before sending off the check to the seller to make sure they are making the payments, I find it easier to do it this way), anyhow, there’s nearly $12,000 that comes into my business account every month, and was wondering what to do about taxes, and how to handle this. Some of my sellers are asking for a statement of account, or special tax forms. I am unsure of what to give them.
By the way, some of the properties are not giving me any cash flow, so it’s break even. The rent passes to my account then a check is cut to my seller for the same amount.
I know I should speak to a tax person directly, but wanted some input from the real estate pros on this.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by randyOH
Posted by randyOH on February 06, 2010 at 12:15:19:
You could send your sellers a 1099misc for the rent you pay them. I am not sure this is required for rental payments, but perhaps it is.
As to how to report your income and expense on your tax return, I would think you should use sched E. This is the form for rental income and it does not require the payment of the self-employment tax. If you use sched C, you would have to pay the SE tax on any net income.
Also what I can do to cover my butt with the IRS in the future in regards to this type of situation where I collect rent, then simply cut a check from my company to the seller for the same amount, or a check minus cash flow?
Re: Lease/Option Sandwich TAX HELP!!! - Posted by Dave T
Posted by Dave T on February 08, 2010 at 14:25:33:
randy,
Bob does not own the property he rents. Bob sublets the property he rents from others. Bob has no responsibility for maintenance, repairs, hazard insurance, or property taxes. Bob has none of the benefits and burdens of property ownership.
Bob has an active income business NOT a psssive rental activity. Schedule C is the correct form to use.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by Dave T
Posted by Dave T on February 05, 2010 at 08:45:37:
Your sellers are your landlords. You are their tenant paying them rent each month. Your sellers are probably asking for a 1099 MISC showing all the rental income you paid each of them during the year.
You are a landlord to your buyers, they are paying you rent each month.
Your income is your rental collections from your tenant/buyers. Your expenses are your rental payments to your seller/landlords plua whatever office supplies, postage, mileage, advertising, legal, and any other expensess you incur in the course of your business.
Your net cash flow is your taxable business income.
On your tax return, fill out schedule C as a sole proprietor (unless your company is a partnership or a corporation) and compute your social security and medicare payments on Schedule SE.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by randyOH
Posted by randyOH on February 08, 2010 at 17:58:14:
Dave,
You may be right about this and I am not saying you are wrong. However, I was not able to find anything in a rather cursory review of the forms and instructions that would confirm your interpretation of how the law would apply to this situation.
I could not find anything that says you have to own the underlying property to report rental income from real estate on sched E. So my interpretation would be that income from rental real estate is reported on sched E whether you own the underlying property or not.
The only exceptions I could find for reporting rental income on sched C are for renting personal property (such as cars) or hotel/motels where substantial services are provided.
If you have any authoritative sources to support your view, I would be happy to take a look at them.
So, even though these properties still have mortgages on them, there’ still considered INCOME? even though it’s not going directly into my pocket (hip national bank)?
From what I understand, the rent is considered business expense, however the IRS doesn’t deduct 100% of that expense from my taxable income so I would be negative in this situation? Is that correct? I’m still a newbie when it comes to this tax stuff … taxation 101.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by Dave T
Posted by Dave T on February 10, 2010 at 09:59:18:
With 12 sandwich lease deals in place, all of the properties are held primarily for sale to customers. As I see it, all the properties meet the definition of dealer realty and thus, Bob is acting as a dealer to real estate for these transactions.
A dealer activity is an active income business. When done as a sole proprietor, the income and expenses are reported on Schedule C with the self employment taxes computed on Schedule SE.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by Dave T
Posted by Dave T on February 06, 2010 at 19:07:56:
My answer would be the same if the properties were owned free and clear. Any mortgages on the properties are not your mortgages and not your business expense.
You are a landlord. You collect rents. You are also a tenant, you pay rent – not a mortgage payment.
The rent you pay is a business expense. The rent you collect is revenue to your business. In the course of running your business you also have some overhead costs. The difference between your revenue and your expenses is your net income.
Because you are operating this business in your own name, you are a sole proprietor. You are not only the owner of the business, you are also its only employee. Because you are an employee and your own boss, you are said to be self-employed.
As a self-employed individual, your self-employment income is your business’s net income. In addition to ordinary income taxes, the government requires you pay social security and medicare taxes on your self-employment income just as your W-2 job withholds income tax, social security and medicare taxes from your paycheck.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by randyOH
Posted by randyOH on February 10, 2010 at 11:32:32:
RE dealer rules have nothing to do with how the rental income is reported on your return. If you are considered to be a dealer, then the sale of the property would be reported on sched C. But the rental income is still reported on sched E.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by Dave T
Posted by Dave T on February 13, 2010 at 03:34:29:
If you read the instructions for Schedule E, you will find, this dealer rule
“Do not use Schedule E to report income and expenses from rentals of real estate held for sale to customers in the ordinary course of your real estate sales business. Instead, use Schedule C or C-EZ for these rentals.”
I don’t see how you can claim that a sandwich lease option business is not a real estate sales business.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by randyOH
Posted by randyOH on February 13, 2010 at 11:13:27:
I stand corrected on the issue of reporting rental income on sched E if you are a dealer. Thank you for that reference.
However, I am not so sure the other poster would be considered to be a dealer as opposed to an investor or speculator. The fact that he is renting the properties is strong evidence that he is not a dealer. I know if I were in his position, I would certainly not consider myself to be a dealer and I would report the rental income on sched E.
But, to the extent he is a dealer, then you are definitely correct that the rental income should be reported on schedule C and, again, I stand corrected.
Re: Lease/Option Sandwich TAX HELP!!! - Posted by Dave T
Posted by Dave T on February 14, 2010 at 01:03:56:
In Bob’s business, all of his deals are sandwich leases. Every one of those properties are held for sale to customers in the ordinary course of his business. That is his business model.
His business model fits the definition of a dealer to real estate.