Posted by Ronald * Starr(in No CA) on August 27, 2002 at 16:54:48:
Different people have different opinions. I would never claim that property ownership is a sail in the park in a canoe. However, long-term holding of property makes sense to me. If you think that the lease-option approach is better, you can do it.
However, note that when you resell quickly you are considered a real estate dealer. You get no tax benefits of investment property ownership. I know that people think they can lease option the property and thus make it look like an investment property. But we know that is not true. The intent was not there. The intent was to resell the property quickly.
The IRS can recharactize a lease-option as a contract for deed. That means that the taxes must be paid as of the “sale date.” Which would be the time of the lease-option being signed, I would say. If you did it once or twice, you might well have the IRS miss the situation. If you do it many times? I think there is a big risk there of the recharacterization happening to you. Then there is tax to pay, penalties, interest. Would there be a possibility of prosecution for tax evasion? I can’t judge that.
I hope that your attorney and accountant have given you good advise about these issues.
What will you do if it happens to you and you have to come up with huge chucks of change to pay off the IRS? I know, as a rental property owner, that I don’t have to worry about this. I think you, if you do lease-options, should be considering it.
The lease-option approach has exploded in popularity over the past decade or so. It seems to me that when something like this happens, the IRS will eventually alert to it. When they do, what will they do? My guess is that they will do some searching through the tax returns, looking for signs of lease-optioning deals. Then start going after people.
Will this certainly happen? I don’t know. But do you know that it will not certainly happen? Or are you planning to report all your lease options as sales and so avoid the potential of having the IRS unhappy with you?
Good InvestingRon Starr*