A Tax Lease answer - Posted by Bill Gatten
Posted by Bill Gatten on June 23, 2001 at 16:37:34:
Rent it out. Definitely! When the loan is finally retired, you’ll be very glad you didn’t sell it.
However, let me give you an idea you perhaps haven?t though about for getting a lot more rent and ending your landlord responsibilities at the same time. How about leasing it out for 2 or 3 years (or more) on a “PACTrust Tax Lease” basis? In other words: why not charge your tenant more rent in exchange for their being able to take the tax deduction for your mortgage interest on your loan and the property tax.
You need merely figure out what relinquishing the deduction will cost you (if anything), and then charge your tenant commensurately more than that per month. The tenant?s after-tax rental expenses will invariably decrease in proportion his income-tax bracket: while your rental income goes up. Each month he will pay ?less? rent out (after tax) while you take ?more? rent in.
However, here?s the best part…
Note that under IRC 163(h)4(D), in order for the resident beneficiary in a land trust to be able to take the active tax write-off in the first place, they have to be able to demonstrate having the full “risks and burdens of ownership (responsibility for maintenance, repairs, etc.),” along with their beneficiary interest in the entity in which is vested the ?equitable? title to the property.
All of this becomes possible via the PACTrust (3rd party trustee co-beneficiary land trust conveyance). You merely make the tenant a co-beneficiary with a contractual agreement that at the end of a specific period of time (2 or 3 years) the trust and the lease will terminate. Upon termination they will sell you their beneficiary interest for $x,xxx (it can be specified in a silent rider in advance)?and just move on.
You can then raise the monthly payment amount and start all over again with someone else if you wish.
Many think of the PT only as a temporary subject-to holding device, at the end of which the property has to be disposed of: but it doesn’t have to be that way at all. The PACTrust is merely another (far safer and more lucrative) way to do (achieve the objectives of) Wraps, Leases, Lease Options, Lease Purchases, Contracts for Deed, Equity shares, Silent Carries, etc. It?s not another alternative: it?s another way to do all the alternatives.
For now, though, just remember: “Tax Lease???good thing”
Try to structure a similar ?tax lease? arrangement) any other way and you end up with some or all of the following down-sides:
Due on Sale violation
An actual inadvertent disposition (sale) of the property
Multiple parties being subject to having their home or income property embroiled in each other?s creditor liens, suits, judgments and personal problems
BK?s, marital dispute actions, Probate, tax liens, etc.
Virtual impossibly of eviction when/if the resident owner would default and refuse to cooperate
Risk of the seller silently, further encumbering the property
Payment of capital gains tax re. a ?sale? of the property, when that was not the intent
Risk of re-characterization as something else
Risk of parties not acting in the best interest of the other, or later changing their minds later
Bill Gatten