Potential for big score-need tax planning help - Posted by Ben (NJ)

Posted by JPiper on November 08, 2000 at 24:57:49:

You might want to have your CPA evaluate how the IRS would view the assignment to a pension at your cost, and then a subsequent tax-deferred sale at a much inflated price. Not saying it can’t be done…just an area I would want to evaluate in the event I were audited.


Potential for big score-need tax planning help - Posted by Ben (NJ)

Posted by Ben (NJ) on November 06, 2000 at 19:31:29:

In less than sixty days I will be taking title through tax foreclosure on a $200,000 home. My cost is less than $35,000. I don’t want to get slammed in taxes so I want to start planning now. I know not to sell it immediately because I would incur 39% short term capital gains tax. Is my only option to rent it out for at least a year and then sell it, thereby only incurring a 20% long term capital gain? Do you pros have any creative solutions? I am also considering mortgaging the property soon after I take title to pull out most of the cash. Would this be a way around the tax liabilities? Thanks in advance.

Have you considered living in it for two yrs? - Posted by Hope(Fl)

Posted by Hope(Fl) on November 07, 2000 at 14:55:25:

This deal sounds like every investors dream, I am sure you are sooooo excited about this! I dont know if you would consider living in it, but since it sounds like a really nice house, it might be an option. If you decide to live in the home, you would pay NO TAX at all on any profits provided you lived there for 2 yrs. This would definetly be somethin I would carefully consider. Best of luck to you Ben

Re: Potential for big score-need tax planning help - Posted by Steve (OH)

Posted by Steve (OH) on November 07, 2000 at 07:43:45:

I am fairly new to this and am still learning so if I am off base, then disregard. I would think your idea of putting a mortgage on the property and then renting it out for a few years would be your best bet. Assuming the house needs no fix up, you could pay cash for the 35k (I am assuming you have this cash). Then put an 80% first on it for 160k (80% of 200k). PI payment would be approx 1287 (30 yr at 9%…figuring conservative rate). You then can pocket the 160k-pay off the 35k if you are using a home equity to buy it and have a 125k TAX FREE “profit.” (I know it is not actually profit, but you can use it to buy something else while a renter pays for the mortgage.) I would think you could get someone to rent it for 1500-2k or so, eh?

I think that is how I would approach it, but I may be out of line.

Good luck! Steve

Re: Potential for big score-need tax planning help - Posted by Ron(SC)

Posted by Ron(SC) on November 07, 2000 at 07:23:40:

Ben, if you can use Roth IRA funds, it would clearly be the most tax friendly in the long run. The section 1031 exchange is also an option and not a bad one. The question ultimately is liquidity versus tax liability. Your proposal to hold for 1031 exchange while levering the property with debt (therefore providing liquidity) may be the best of both. Perhaps a carefully structured L/O , with an exchange at the end of the term might also fit your needs - but ask one of the L/O experts about that.

Good Luck,

Re: Potential for big score-need tax planning help - Posted by Sheila

Posted by Sheila on November 06, 2000 at 23:11:15:

Wow…sounds like a great deal. Could you tell us the details?

Thanks in advance.

Consider doing the transaction in an IRA - Posted by Lynn

Posted by Lynn on November 06, 2000 at 22:01:51:

If you do the transaction within your IRA you can possibly avoid “ever” paying tax on the profit (a.k.a a Roth IRA). Check out Mid-Ohio Securities web site at http://www.mid-ohio-securities.com/ They will take good care of you and there is a lot of good info on their web site.

Happy Investing!

Re: Potential for big score-need tax planning help - Posted by TRandle

Posted by TRandle on November 06, 2000 at 21:33:28:

Depending on how your entities are structured, could you not hold it for a while (at least 18 months recommended by an intermediary I’ve talked to), and then 1031 into something else? What do you plan to do with the property?

I’ll think about it…ok, no. - Posted by Ben (NJ)

Posted by Ben (NJ) on November 07, 2000 at 17:14:06:

I don’t like to mix my business and personal life and therefore use a few different entities and trusts for privacy purposes. I wouldn’t want foreclosees knowing where I live (especially when its THEIR former home!). Thanks for the encouragement.

This is the rare exception, not the rule - Posted by Ben (NJ)

Posted by Ben (NJ) on November 07, 2000 at 07:33:57:

3 years ago I bought a tax lien on this property. It is a nice single family home in a good neighborhood and had a six figure mortgage on it. This is the type of lien that has a 99.9% chance of redemption. After two years I began foreclosure proceedings and discovered that the mortgagee (private) had passed away. Normally if the owner cannot pay off the lien, the mortgagee will usually redeem. However, since they passed away, the lien never got paid. Why the owner never did anything is a mystery. The owner personally signed for all process service. Never got an attorney, never filed BK, never put the house up for sale, never called me for an extension, NOTHING! I did get a call from a neighbor about riff-raff coming in and out of there. Maybe they are on drugs. It’s coming down to the wire and still no indication of being paid so I have to assume I am getting it and plan accordingly.

What about a pension plan? - Posted by Ben (NJ)

Posted by Ben (NJ) on November 07, 2000 at 07:44:50:

Instead of an IRA I use a defined benefit contribution plan on which income is tax-deferred. I could assign the lien to this entity then final judgment would be taken in the name of the pension plan. This may be the way to go. Thanks! I’ll discuss it with my accountant.