Posted by Jeffery (LCLA) on April 23, 2004 at 06:42:38:
Good Luck.
TAXES - Posted by WES
Posted by WES on April 22, 2004 at 16:48:32:
I’VE BEEN READING ARTICLES ON CREONLINE FOR ABOUT A MONTH.
SINCE I AM NEW AT THIS, I AM TRYING TO GET OVER THE FEAR
FACTOR THAT MANY TALK ABOUT. I THINK WITHIN THE WEEK I WILL
TRY A MH DEAL. BUYING LOW AND FINDING SOMEONE TO “RENT TO BUY”. I LIKE THIS IDEA OF LONNIE’S. MY QUESTION HAS NOT BEEN ANSWERED IN ANY OF THE ARTICLES I HAVE BEEN READING.
IF THIS SALE GOES ON SAY FOR 24 OR 36 MONTHS, WHEN DO I PAY
LONG-TERM CAPITAL GAINS? AT END OF SALE? WHAT ABOUT THE DOWN PAYMENT AND RENT COLLECTED THOUGHOUT THE YEAR? IS THIS DECLARED AS REGULAR INCOME? IF I SALE IT OUTRIGHT WITHIN THE YEAR, ARE THERE SHORT-TERM GAINS TO CONSIDER?
PLEASE DON’T LAUGH AT MY STUPIDITY AS I AM REALLY GREEN.
THANKS
Finally, someone who writes big enough so… - Posted by Dr. Craig Whisler CA
Posted by Dr. Craig Whisler CA on April 22, 2004 at 20:40:08:
…I can read it without using my binoculars.
Good. You can see problems acoming, off in the distance.
The good news is you can make 100%-200% on your money, or more, doing Lonnies deals.
The bad news is you are taxed on the entire amount of your gain, immediately, even though you will not receive it all for 2-3 years hense. Your tax is due in the quarter it is earned. If you have held the mobile home for less than a year at the time of sale you will owe tax at ordinary income rates, under the IRS treatment of installment sales, unless you do some sort of lease option, or rent to own sale. Many folks are currently getting away with lease option arrangements. In my opinion they are only getting away with it because the IRS’ audit rate is so low. The IRS has a general rule that says something like, if it talks like a duck and walks like a duck, we are having duck for dinner tonight. That means that if your transaction even faintly resembles a disguised sale to get around the installment sale reporting provisions of the code, they WILL tax you as a sale. I believe Mr. Tew disagrees with me of this point. I have the highest respect for Mr. Tew. We just see things differently.
I wouldn’t lose any sleep over how the downpayment is to be characterized, as in most cses it is little more that a return of your capital and therefore not taxable.
Don’t worry about the tax problem. It isn’t as harsh in actual practice as it might seem. Try to get as big a downpayment as possible or try to sell your note or a part of your note as soon as you get it. This will solve your tax problem. You should be in a lower tax bracket when just starting out anyway. We are only talking about maybe 15%-20% for most newbies. If that really worries you just set aside about 10% of your capital for each deal to pay taxes.
I would suggest trying to find ways to recharacterise earned income into passive income so you would not have any social security taxes to pay on your “investments”. Cutting your taxes by 15% is REALLY cutting a fat hog (the IRS).
There are no stupid questions: Only stupid mistakes, by folks who were too stupid to ask stupid questions in the first place.
As for being laughed at, I can promise you at least a little horse laughter if you continue to write in all capital letters, pardner. It gets some younger folks all riled up.
:~)
Regards, doc
Taxes, Doc, Lyal, Steve, other pros, Help. - Posted by Jeffery (LCLA)
Posted by Jeffery (LCLA) on April 22, 2004 at 18:09:23:
WES, please lose the caps lock button, it hard to read and the equivelent of YELLING! Sorry, didn’t mean to raise my voice. When you sell at a profit, either in cash or on terms, you pay taxes the year you make the sale. Example: You buy for $1k and sell for $2k. Your basis is $1k and your gains is $1k, you would pay taxes on the $1k profit. If you later have to repo the home and sell again, your basis would be $2k and your gains would be for whatever you sell the home above that $2k. If you have to sell it for less than $2k, then you would have a loss. If you pay $1k for a MH and have to do repairs, then the cost of those repairs also add to your basis. If you do a rent-to-own, some things don’t count as capital improvements because it’s still rental property. I’m not clear on the tax law regarding rent-to-own. Currently I just rent. I would have to suppose, however, that since the property is still a rental and the title is still in your name, a sale wouldn’t actually occur until title changed hands, at which time you would have to pay taxes but that’s just a supposition.
Now that I think about it, tax wise, it seems that selling on terms is better than rent to own. With rent to own, you pay an income tax, and on owner finance you’d pay cap gains tax. Hmmmm. Doc, Steve, lyal, can someone elucidate, clarify, or otherwise enlighten us on this tax question?
Keep in mind that I’m just a rookie and not a tax professional so this advise is worth about what you paid for it.
Best regards and good luck,
Jeffery (LCLA)
How mobile home sales are taxed - Posted by Ernest Tew
Posted by Ernest Tew on April 23, 2004 at 20:53:36:
While reading these posts, it became obvious that the tax aspects of buying and selling mobile homes isn’t very well understood.
When we buy assets, such as mobile homes, with the intention of reselling, the IRS says that we are a dealer and the mobile homes are our stock in trade. As such, we are not entitled to long-term capital gains treatment or allowed to use the installment reporting method. Installment reporting is available only to non-dealers who have not held the property as inventory for sale. Even though we sell the home on terms and expect to receive payments over a period of years, all gain (profit) is taxed in the year of sale, as if the price were paid in cash.
A $5,000 profit earned on the sale of a home is fully taxable in the year of sale?even though we may have received only $1,000 from the buyer. While a lot of profits can be earned by buying and selling homes, you can see how a large number of sales might cause tax problems.
Creative investors can often achieve the desired results by changing the way they do business. Instead of selling our manufactured homes, we lease them with an option to buy. With proper documentation, any taxes on the gain can be deferred until the option is exercised. And, unlike interest income, much of the rental income is sheltered from income taxes by taking depreciation deductions on the homes while they are being rented.
Careful documentation is extremely important. 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. Factors that the IRS consider include: (1) whether the lessee routeinly acquires title after making a certain number of payments; (2) whether the lessee is given credit for a portion of each lease payment; (3) whether the rental payments materially exceed the fair market value of the property; and (4) whether there is a “meaningful” price when the option is exercised.
To avoid having to pay income taxes on profits not yet received, these considerations must be taken into account. We solve the problem by entering into two separate agreements: A specially-designed Net Lease Agreement and a specially-designed Option To Purchase.
While Doc may disagree with me, several CPAs, attorneys and hundreds of investors have used these forms to complete thousands of transactions. To the best of my knowledge, none have experienced any IRS or legal problems with the forms.
If you would like to receive free copies of these forms, please send me an email. To learn more about cutting taxes on mobile home and mobile home park profits, you may want to order a copy of my manual, “How To Get Rich Helping Others.” It comes with a computer disk containing all the legal and business forms you will need.
Re: Finally, someone who writes big enough so… - Posted by Chris Reuman (ME)
Posted by Chris Reuman (ME) on April 23, 2004 at 13:23:54:
Doc, I always appreciate your thoughts. You mentioned:
“I would suggest trying to find ways to recharacterise earned income into passive income so you would not have any social security taxes to pay on your “investments”. Cutting your taxes by 15% is REALLY cutting a fat hog (the IRS).”
Could you elaborate on your thoughts. We all want passive income vs earned income. What ways have you turned your earned income to passive income?
Thanks for your comments. chris
Re: Taxes, Doc, Lyal, Steve, other pros, Help. - Posted by Wes
Posted by Wes on April 22, 2004 at 22:41:55:
Thanks to both doc and so far jeffery for your input. I have talked on the phone with my first prospective
seller and am meeting him am tomorrow. By phone this
sounds just like the articles I have been reading. Wish me luck.
Also, I have had training at work not to yell by using
all caps. Please accept my appoligy.
catch this . . . - Posted by Steve-WA
Posted by Steve-WA on April 22, 2004 at 21:21:10:
depends on how you book it. Using the aggressive cash method with typical LDs (archive: INSOMNIA), you can defer some of the total tax on your profit.
Rent to own - you make more money, and you only pay tax on rent rec’d, less expenses, until the option is exercised, then it is a purchase, and you pay on the gain.
ow my head hurts now
Re: How mobile home sales are taxed - Posted by Dan MOJITO Gonzalez
Posted by Dan MOJITO Gonzalez on December 13, 2005 at 08:21:43:
Please forward the free copies of the Option to Purchase & Net Lease Agreement docs.