Posted by JohnBoy on January 28, 2005 at 11:40:18:
Bad example. That is a parent involving a child where they remain in control of everything.
The way your trust is structured the seller assigns all and any control they had to you. After that only you would have the power to revoke the trust.
My CPA is KILLING ME! - Posted by stan
Posted by stan on January 27, 2005 at 17:11:36:
All,
This has to do with taking advantages of the tax benefits of property in a Land Trust (The seller grants the property into a land trust, then the seller assigns their beneficial interest to my LLC).
My CPA and I are in a battle about this. She says that because a Land Trust is revocable, the grantor (seller) can, at anytime, revoke/terminate the trust and get the property back!!! Is this true? And because the grantor can get the property back by disolving the trust, all tax benefits belong to the seller.
She also stated that the interest deduction cannot not be taken by my LLC (the new beneficiary) because I’m not at risk with the underlying lender (Subject To transaction). She gave me a case to review Jimmy Song and Chien-Yen Che v. Commissioner as a reference. http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl9a22/1/doc
There seems to be some merit to what she is saying.
Any thoughts on this?
Thanks much.
Re: My CPA is KILLING ME! - Posted by JohnBoy
Posted by JohnBoy on January 28, 2005 at 24:17:17:
Have your CPA read this case:
Saffet and Ana Uslu
http://www.ustaxcourt.gov/UstcInOp/asp/HistoricResults2.asp
This case cites Golder v commissioner as well. The tax court found in favor of Petitioners in this case. It basically supports everything I was saying.
BTW, this case also sited where buying a home subject to the existing mortgage was the same as a non-recourse loan were the buyer is obligated to the borrower to make the mortgage payments. Go figure!
YOUR CPA CAN’T READ!!! - Posted by JohnBoy
Posted by JohnBoy on January 27, 2005 at 21:51:26:
Once the seller assigns all of their interest in the trust over to your LLC then the seller no longer has any power to revoke anything. Only your LLC can revoke the trust once all the beneficial interest is assigned to it.
Your CPA needs to go back and reread that case. That is a case where title and the loan was in the brother’s name. Then transferred to a trust naming the sister as a beneficiary. The sister never had an obligation to the brother to make his mortgage payments. They merely put the property into a trust. There was no contracual agreement involved where the sister was obligated to make the brother’s mortgage payment. Even though she may have made the payments, the fact is she was not obligated to do so. This wasn’t a case where the sister purchased the property subject to the existing mortgage. It is a case where the sister was named as beneficiary of the trust on behalf of her brother. But she was never obligated to make any mortgage payments.
When you buy a property subject to the existing mortgage you aren’t just deeding title to a trust and then assigning the interest over and that’s it. You are entering into a purchase agreement where you are purchasing the property and taking the payments over subject to the existing mortgage. You are obligated to make those payments! You have a contract with the seller that obligates you to make those payments. If you don’t make the payments the bank can’t come after you, but the seller most certainly can come after you and sue you for breach of contract by failing to make those mortgage payments.
In that case your CPA referenced none of this was a factor involved with that case. There was no contract involved that required the sister to make any payments on her brother’s mortgage. They just put the property into a trust which stated the sister was a beneficiary on behalf of her brother.
When you are assigned the beneficial interest of a trust you are not being named the beneficiary on behalf of the seller. You are the beneficiary on behalf of yourself. You have a contract that obligates you to make the seller’s payments. Since you have a contractual obligation to make the payments, even though the mortgage is not in your name, then you get to deduct the interest.
That case in reference even states this.
Read this part carefully. You will see that this would apply when buying subject to.
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"Section 1.163-1(b), Income Tax Regs., provides in pertinent part:
Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.
In Golder v, Commissioner, supra, the Court of Appeals for the Ninth Circuit, to which an appeal in this case would generally lie, had occasion to construe the foregoing regulation on which petitioner relies, The Court of Appeals stated:
Reg. section 1.163-1(b) must be read in its proper context, i.e. in light of its parent statute, section 163(a) of the I.R.C. Section 163(a) permits an interest deduction only on the taxpayer’s own indebtedness, *** Reg. section 1.163-1(b) does nothing more than permit the deduction of interest in situations where the taxpayer-borrower is not personally liable on a mortgage of property which is used as security for a loan made to the taxpayer For example, a taxpayer purchases land paying part of the purchase price in cash and the balance with a non-recourse note secured by a mortgage on the land; there, in the event of default, the creditor may look only to the property. Although the taxpayer is not directly liable on the debt?since the creditor may look only to the pledged property for repayment?Reg. section 1.163-1(b) permits the taxpayer to deduct interest payments since the default affects only the taxpayer and no one else. The taxpayer must pay the interest to avoid foreclosure of his ownership interest in the property. Thus Reg. section 1.163-1(b) does not create an “exception’ to the statutory rule of section 163(a) that interest is deductible only with respect to the indebtedness of the taxpayer, but simply recognizes the economic substance of non-recourse borrowing. Reg. section 1.163-1(b) permits the taxpayer-borrower in such cases to deduct the interest on the loan even though the taxpayer is not personally liable on the loan. [Golder v. Commissioner [79-2 USTC ¶ 9451], 604 F.2d at 36; fn. ref. omitted.]”
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As you can see here, a tax payer CAN deduct the interest even though they are not liable for the loan.
Thew problem with the referenced case is this:
Petitioner attempted to satisfy her burden of proof in this case principally through her testimony, the testimony of her brother, and documentary evidence consisting of the February 19, 1989 document. We found the testimony of both petitioner and her brother to be questionable; their testimony was at times vague, evasive, or internally inconsistent, In addition, petitioner and her brother contradicted each other during their testimony with respect to the alleged reason why they signed the February 19, 1989 document. We are not required to, and we do not, accept their testimony as sustaining petitioner’s burden of establishing error in respondent’s determinations.
See the problem here??? This case had nothing to do with buying subject to the existing mortgage. There was question as to why they even put this in a trust the way they did. They contradicted each other in their testimony. There was never any contract that required the sister to make her brother’s payments. It’s clearly obvious why she wasn’t allowed the deduction!
Re: My CPA is KILLING ME! - Posted by Tom-FL
Posted by Tom-FL on January 27, 2005 at 20:24:03:
My understanding of point 1 is that the trustee works to the pleasure of the beneficiary, not the grantor. Therefore the trustee would not be obligated to a grantor who has no further interest in the trust after divesting himself of it.
Second point has been discussed ad nauseum on these boards and the conclustion is always the same: He who PAYS the interest CLAIMS the interest. I’ve never heard or read about this “at risk” position.
Check the archives. You’ll be reading for days.
The grantor can revoke the Land Trust? - Posted by stan
Posted by stan on January 28, 2005 at 06:22:32:
Tom,
Thanks for your response.
I guess what I don’t understand is ‘revocable’. My CPA stated that the grantor can revoke the trust at any point and that seems to put the whole transaction at risk. You are potentially 2 years into a deal with a Tenant/Buyer in the property and the grantor (seller) decides to cancel the deal and revoke the trust.
Re: The grantor can revoke the Land Trust? - Posted by JohnBoy
Posted by JohnBoy on January 28, 2005 at 09:56:50:
At any point where the grantor remains the beneficiary. Once the grantor assigns away all of his beneficial interest then there is nothing he can revoke. Only you as the new beneficiary can revoke the trust.
Re: The grantor can revoke the Land Trust? - Posted by chet
Posted by chet on January 28, 2005 at 08:48:49:
reading the case the trust doc was cobbled together very ad-hoc.
What portion of the IRS’s case what due to the hokeyness of the trust?
Re: The grantor can revoke the Land Trust? - Posted by stan
Posted by stan on January 28, 2005 at 11:12:55:
Thanks.
Well, the thing that is confusing me is my Accountant used the example of:
Grantor: Parent
Trustee: Somebody that the parent trusts
Beneficiary: Child
The child is the beneficiary, but the parent still controls the trust and can revoke it.
However, I’m not sure if that type of trust revocable or irrevocable, nor am I sure of what type of trust that would be.
Anyway, thanks for your time.
Re: The grantor can revoke the Land Trust? - Posted by Tom-FL
Posted by Tom-FL on January 28, 2005 at 22:21:20:
That’s a different trust layout. First, it’s a three party trust: Grantor, Beneficiary, and Trustee.
In a land trust, the Grantor and Beneficiary are usually one in the same. Thus a transfer of beneficial interest means a transfer of control as well.
The three party setup is ordinarily used if the beneficiary is incapable of exercizing control, due to either being underage, elderly, or mentally incapacitated.
Re: The grantor can revoke the Land Trust? - Posted by chet
Posted by chet on January 28, 2005 at 21:32:19:
“However, I’m not sure if that type of trust revocable or However, I’m not sure if that type of trust revocable or irrevocable”
if it’s irrevocable, it can never be revoked, cancelled, disolved.
There is an atty article on here that does a pretty good job explaining this.
But it’s all a game. w/ your CPAs concern or not, the DOS clause has been violated.