Posted by Ernest Tew on June 27, 2004 at 08:31:52:
Mike,
We first prepare an amortization schedule, based on the agreed terms. The $10,817.47 is the balance after making payments for five years. That figure is rounded to the nearest $50 to arrive at the option price.
Regardless of what we call the transaction, if it ?too closely resembles a sale,? it could be treated as a sale by the IRS and taxed accordingly. Among other things, the price must be “meaningful” when the option is exercised. That is why the term of the option is less than the term of the lease.
However, the option agreement provides that the entire option price can be financed over a period of time (the remainder of the lease term).
A dealer who leases property for a period of years and then sells it for a token amount of money at the end of the term, could be creating a serious problem with the IRS. If audited, they could be required to pay interest and penalties on the taxes as well as the taxes that should have been paid in the year of sale.
I’ve got Earnest Tew’s book and on page four of chapter fourteen he’s describeing a net lease with an option to buy deal. First, how does he arrive at the Option price of $10817.47. For the life of me I cant figure it out. And why does he offer only an option to buy in year five of the contract. Does that mean at the end of the ten years the buyer cant “buy” the title for say one dollar. And is a net lease with an option the same as rent to own? I know people renting to own then selling the title for one dollar at the end of the note’s time. Thanks for any help here.
Thanks Ernest for the reply. When you’r like me and just getting into this real estate game then you can be stumped by the simplest things.Even Lonnie’s book DOW assumes we kown a little something, and its really geared for beginners. Things like does a promissory note have to be noterized? One of the best things about this board is that it raises lots of questions that other wise we would have never have thought of. Im in the process now of makeing a list of questions and at some point im going to go to a local attorney that specializes in real estate and sit down with him and get some answers.Then I’ll sit down with my accountant and get some more answers.Then when I feel comfortable with all the legaleze Ill do my first Lonnie deal. Ill give you a little example of why you should do your homework. Over the last three years I have remolded four old houses here on the family farm. These are homes that my grandparents were born in back in the 1800s. When I finished remodleing them I just put them on the market and rented them out. Now Ive found out that I should have had something called a Lead paint disclosure form signed. Something that needs to be done with any home built before 1978 I think.There’s just nothing simple anymore… Thanks again for all the help … Mike…