Posted by JHyre in Ohio on May 12, 2009 at 07:14:56:
I will write them in my capacity as both a tax lawyer who works with investors and an investor. Nice post.
John Hyre
Attorney, Accountant, REI
Possible change in the tax laws, will benefit LD - Posted by Ringer
Posted by Ringer on May 09, 2009 at 19:00:05:
Possible change in tax law.
The National Association of Real Estate Investors (NaREIA) has made a priority legislation which would allow people in the real estate industry; builders, “dealers,” rehabbers, wholesalers, etc., to be allowed to take back mortgages using the installment sales reporting method. This would benefit people in our business as well as be a real stimulus to the economy without shortchanging the taxpayers.
The bill is currently being written and will be introduced in the House Ways and Means Committee in the next few weeks. There are two co-sponsors, one Democrat and one Republican. NaREIA has met with many members of Congress and their staffs. Their response has been over 90% positive and many have agreed to sign on as a co-sponsor.
NaREIA is asking folks in the real estate industry, the cash flow industry, realtors, building trades, etc., for any data, demographics or persuasive arguments they have that may help them make their case.
The members they have met with have also stressed how important it is to get people to call or write (preferably faxed) their support of this proposal, commenting on the positive aspects of it, i.e., job creation, increased revenues, less stress on banks, etc. As this legislation would have many positive effects for those of us in the cash flow industry, we at NoteWorthy encourage you to contact your representatives, urging their support of this bill.
The initial proposal that has been given to members of Congress is below. Please contact Dave Corsi at 732-923-1410 with any questions about the legislation or to offer your assistance.
Installment Sale Proposal
In light of the downturn in the real estate market, coupled with the President’s and Congressâ??s efforts to pass a stimulus package, we would like to propose a change in the tax code that will move the economy onto more solid footing. Changing the tax code to allow builders and rehabbers (groups defined as â??dealersâ?? under the Internal Revenue Code) to use installment sale tax treatment would benefit all parties involved, along with the nation as a whole.
Prior to the â??Tax Reform Act of 1986," investors, builders, dealers and rehabbers were allowed to elect Installment Sale Tax Treatment. Briefly stated, Installment Sale Tax Treatment allowed any person or entity to hold a note and receive payments over an extended period, and pay the tax owed as the money is received. The Tax Reform Act of 1986 disallowed â??dealersâ?? and buildersâ?? from enjoying this tax treatment. From that point to the present, the entire tax is due in the year of sale, without any regard as to when the profit was actually received.
For example, a property in need of repair was purchased for $100,000. It needs $40,000 in repairs and after fix up will be worth $175,000. Prospective buyers love the property and would like to purchase it. They have $15,000 to put down. The bank will lend them $125,000 for a total of $140,000. The rehabber/seller would be willing to receive their profit over time by taking back a second mortgage of $35,000 in monthly installments, for instance $275.00 over 15 years.
If the property closing took place in January, the seller/rehabber will receive $3,300 in payments ($275 x 12). If they are in the 30% tax bracket they will owe $10,500 in federal taxes. Since they only received $3,300, they will have to come up with an additional $7,200 in taxes. This punitive situation has kept many investors from holding notes and mortgages. Another concern is in the event of buyer default at some point in the future, the seller/note holder will have to amend their tax return, as they did not receive the anticipated profit that was reported in the year of sale.
Banks, credit card issuers etc are allowed to pay tax on income as it is realized. We believe this allowance should be extended to businesses in the real estate and construction industries as well.
Many builders and rehabbers would welcome the opportunity to create notes and mortgages if they were allowed to pay the tax in the year that the money is actually received. It would help them create a solid predictable cash flow to even out their business activities, thereby helping to keep the national economy on a pro-growth path.
The following are some examples of the positive benefits that allowing for Installment Sale Tax Treatment will create:
Stabilize the balance sheets of financial institutions â?? With private parties (rehabbers and builders) holding mortgages, many of which would be in a junior lien position, notes and mortgages issued by financial institutions would be more secure. The financial institutionâ??s notes would have a lower loan to value ratio, resulting in more safety and liquidity.
Financial Institutions Exposure to Foreclosures - With private parties holding junior liens and wishing to protect their investments, these private parties would be better equipped to deal with a homeowner/mortgagor in financial distress in a more personal, results-oriented manner. This will have the effect of providing an extra degree of safety for the financial institutions’ first (superior) mortgages.
Lower Risk to Fannie Mae and Freddie Mac â?? As the loans insured by Fannie Mae and Freddie Mac carry a lower LTV ratio, they would less risky and of higher quality, thereby putting less strain on their portfolio. They would have more access to capital. Risk would be spread among the thousands of investors who will be holding the second mortgages, not to the government, its quasi-government agencies, and the taxpayers.
Strengthen the Financial Health of Builders and Rehabbersâ?? By allowing Installment Sale Tax Treatment to be taken by Builders and Rehabbers, more properties could be sold quickly, creating a safe predictable cash flow and a more stable tax base.
Improvement in the Nationâ??s Housing Stock â?? By allowing rehabbers to elect installment sale tax treatment, properties in rundown neglected areas would be rehabbed, creating jobs and economic growth in these communities and increasing property values…and it can be done with private dollars. Taxpayer exposure would be minimized and blighted communities would spring back to life as vibrant desirable neighborhoods.
Create Employment Opportunities in Construction and Ancillary Businesses â?? By allowing builders and rehabbers to use elect installment sale tax treatment, the number of new houses and renovations will rise. This will create jobs; in the construction trades, for manufacturers of building materials, building supply dealers, real estate, property managers, bookkeepers, etc.
Stabilization of Real Estate Values allowing for a Steady and more Predictable Tax Base â?? With financing more plentiful and risk diminished, property values throughout the nation will have a more solid foundation and can avoid precipitous ups and downs. The result? A more predictable and stable appreciation of values that will create a more stable tax base.
Help Keep Home Ownership Levels High â?? With the builders and rehabbers able and willing to provide some of the financing available, the number of Americans that will be able to own their own home will increase.
Increase Government Revenues â?? With a change in the tax code, thousands of builders, rehabbers, investors and dealers, throughout the nation would be ready, willing and able to buy, renovate and improve properties. Tax revenue will increase exponentially and flow into the government coffers. The tax rate would be based on â??ordinary incomeâ?? and paid as it is received.
Because of this inequity in tax treatment over the last twenty years, many investors, dealers, builders and rehabbers have passed on many potential opportunities that could have resulted in â??win-winâ?? situations for all parties involved. By once again allowing these groups to elect and take installment sale tax treatment, all parties concerned would benefit.