Posted by Bill Gatten on November 13, 1998 at 19:44:54:
In our 3rd party land trust conveyance system, whomever makes the payments takes the write-off [IRC Sec 163, but specifically (h)4(D)]. However, even though the Resident Beneficiary takes the active deductions, since the seller hasn’t disposed of the property (beyond his living trust), and since his interest is characterized as “income property,” he is entitled to the Passive Loss (depreciation). In other words, upon initiation of the [PACTrust] the property becomes a 1031 property until the trust’s termination and the final disposition of the property. Moreover, because of the reversionary benefits of a land trust, no tax may be due upon sale at all, even in the face of a large gain (although any depreciation taken will, of course, be added back to the Basis upon sale or exchange).
Interestingly: Even though the beneficiary interest in a land trust is characterized as personalty (not realty) it can, none-the-less be traded for realty in a 1031 like-kind exchange (see Rev. Rul 92-105).
Note too, that in the PACTrust (what we call the 3rd party land trust conveyance system), buyers and sellers can agree to share anything they want, in any proportion. They can share profits on sale; Power of Direction (“voting rights”); management costs; payments; taxes… whatever (if the non-resident beneficiary makes a portion of the payment, or spends any money on the property, he can write it off too). Note that when I’m the seller I always share 50:50; when I’m the buyer I always share 90:10 with a forfeiture of the seller’s 10% at termination, as consideration for my prompt payments and performance throughout the Agreement.