Posted by Randy, OH on February 06, 2002 at 18:47:30:
David,
I have not done any MH deals yet, but it looks interesting. Taxwise, you could get some relief by using a low FMV for your note. My question is how do you prove your FMV to the IRS if you are audited. This subject was addressed again on 2/2/02 under “fair market value and taxes.” Take a look at the response from Lyal. If you can obtain some written quotes on your note, that might satisfy an IRS agent in an audit. At the very least, it should protect you against a negligence penalty. Hope this helps. Where are you in OH? I am in Tuscarawas County.
Randy
Posted by Andy(MO) on January 28, 2002 at 13:01:08:
I just finished reading DOW for the first time. It is a great book and great idea but I was slightly disappointed when I found out that income taxes had to be paid on the gain in the same year it was sold. This could easily turn a deal with a 95% pre-tax return into a deal with a 55% after-tax return. Don’t get me wrong 55% is a great return but it is 40% less than originally assumed. Wouldn’t it be possible to enter into a deal and owe lets say $900 in taxes and then have the buyer default 3 months later and still owe the taxes. In this case you would probably resell it and incur another $900 tax liability for that same year. I am a newbie but I think this is an issue that I need to clear up for myself before I proceed. I am I being to pessimistic or is this a legitimate concern.
Posted by Karl (Oh) on January 28, 2002 at 14:15:30:
John Hyre is a tax attorney who does Lonnie Deals, and has successfully used one approach that softens the tax hit.
When you sell a mobile home and create a note, that note has a current market value of, say, 60% of the face value. So initially your taxable gain on the deal is the discounted market value of the note minus your basis in the deal. As you collect payments over time, you pay additional taxes on both the interest earned and the previously untaxed principle as its actually realized. Eventually you end up paying the same tax amount, but the tax payments are spread out over time, which increases your yield. Correct me, John, if I didn?t explain that properly.
If you create a note greater than your basis, you have a taxable gain. If the note goes south, you have a loss. Both the gain and the loss would be considered to determine taxable income. Again, someone correct if I?m wrong, I?m certainly no tax expert.
Search the archives for this topic, you?ll find a much more detailed explanation from John on this approach.
Posted by Randy, OH on January 30, 2002 at 18:34:46:
Karl,
You did pretty good for not being a tax expert. This is a fairly complicated tax subject if you have to do a repossession. When you sell, you are taxed on the difference between the fair market value of the note and your basis in the MH. The fair market value of the note would be the same as the face value unless the stated interest rate is different from the market rate for comparable notes. The sale would not qualify for installment sale treatment, so all of your gain would be taxed in the year of sale. If you do a repossession, you will have a gain or loss equal to the difference between the basis in your installment obligation (plus any costs incurred in the repo) and the fair market value of the MH you are taking back. In the first year, you are being taxed on some income that has not been realized, but, in subsequent years, you will realize that income tax free. Hope I have not confused the issue too much.
Randy
Posted by Karl (Oh) on January 30, 2002 at 22:08:28:
Randy,
In your post you say “The fair market value of the note would be the same as the face value unless the stated interest rate is different from the market rate for comparable notes”. Isn’t the fair market value of a note only what a note investor would be willing to pay on the open market? Certainly not face value. Did I read your comment wrong?
Using Hyre’s method, all of your gain would not be taxed in the year of sale. That was the point of my post.
Posted by Randy, OH on January 31, 2002 at 18:25:00:
Karl,
I think it would be a question of what the IRS would accept. If you could show that a note investor would give you a certain amount, that might be acceptable. But, unless you actually sold the note, how could you prove what an investor would give you? Maybe someone on the board has some experience with this. I am not familiar with Hyre’s method, but I am not aware of any way one could defer the gain on the sale of a MH unless it was kept as a rental for a year or two. If you sell right away, you are considered to be a dealer and dealer sales are not eligibel for installment sale treatment per IRC section 453(b)(2)(A). If there is another way to defer the gain, I am not aware of it. Perhaps you could enlighten me.
Randy
Posted by Karl (Oh) on January 31, 2002 at 19:01:17:
Randy,
Yes, there is another way to defer the gain. That was the whole point of my post above.
Do a search for John Hyre tax posts, you’ll find more details about this method.
In order to sell a note on a used mobile home on a rented lot, you would have to offer a substantial discount to attract any of the professional note investors. That’s widely understood. Now getting the IRS to agree on an average discount amount? Yes, that would be the trick.
Posted by Randy, OH on February 01, 2002 at 13:42:22:
Karl,
I did look at John’s posts. Thank you for the reference. I picked up some valuable insights. This board is amazing. However, his “method” is exactly as I explained above, except he goes into a little more detail. As he notes, you get some deferral by using a low FMV for the note. In other words, if you collect more than the FMV, you are taxed as you collect the excess. How to substantiate your low FMV would be the problem if you are ever audited. John admits his approach is very aggressive. Of course, if you are never audited, then there is no problem. I would be interested to know if anyone on this board has had to deal with the IRS on that issue.
Randy
Posted by David (OH) on February 06, 2002 at 14:57:02:
I brought up this topic awhile back. The only person that would say they actually did this “method” in the past was John Hyre himself. I’m sure others have tried, as the tax bite is a big concern for lonnie dealers, but no one would comment on their experience.
John did give some valuable info in that thread. Here it is for your reference.