Tuesday's Tip - Posted by John Behle

Posted by Bud Branstetter on October 28, 1998 at 11:18:25:

From some things I have heard that if the amounts, terms and payments are exactly the same with the intermediary collecting and paying the same then the IRS will look at it as a sale. It then becomes taxable.

Sorry I haven’t tried it to find out if the IRS will. Just change the terms and don’t try to see if in several years the IRS decided it was a sale.

Tuesday’s Tip - Posted by John Behle

Posted by John Behle on October 27, 1998 at 19:46:32:

Have any private financing you are paying on? Try a “Discount Refinance” technique. Negotiate a discount with the private note holder for early payoff and then arrange financing through an insitution for the lesser amount. OR - finance for the same amount and invest the difference - OR - finance for the maximum amount possible and invest in paper. Your net payment will be much lower and your potential profits from the paper can be incredible.

Private note holder won’t discount? Find another note (or notes) that is similar. Buy it at a discount, subsitute collateral with the seller (he releases the property as collateral and takes this note you bought as collateral) and then finance for the amount you needed to buy the substituted note. I call this the “Discount Substitution”.

Is it true when using this technique… - Posted by FJW

Posted by FJW on October 27, 1998 at 22:58:29:

that if the seller accepted a note secured by the purchased note & mortgage that it would not be a taxed transaction?

Thank you.


Trade vs. Substitution of collateral - Posted by John Behle

Posted by John Behle on October 28, 1998 at 12:04:58:

If you were to trade a note for a property or obligation, the IRS would consider it a taxable event as if cash was paid. With a property, they would consider the trade of a $100,000 note for a $100,000 property as “Boot” or “unlike kind property” in an exchange (IRC1031).

If I use a note as collateral for a new note, it can still fall under the provisions of an “installment sale”. If I buy the property with the creation of a new 100k note between me and the seller, it is an installment sale. The property that is the subject of the installment sale does note have to be the collateral for the note. It could be secured by another property, another note, or even unsecured. He can give me the property free and clear and still have his tax benefits.

In books or posts sometimes I use the word “trade” to help simplify the picture of what is happening, but I am always referring to a substition of collateral type situation where I stay in the middle.

When I first began “trading” notes for properties, I wanted to give them the note and be done with it. I found that they would have a tax problem (and probably not even know it) and I would have a tax problem. I found a way to solve mine, but was un-willing to stick them with a tax problem.

So, I reluctantly gave in to staying in the middle because of the tax provisions and because they also always wanted me to collect and guarantee the notes.

One of my axioms I try always to follow is “NO LIABILITY WITHOUT CONTROL”. If I have any liability, I want control of the situation to minimize risk. There is no way I would guarantee a note (even implied) without collecting the payments and being able to deal immediately with potential problems. Liability without control is what was the death of early PMI (Private Mortgage Insurance) companies like VEREX.

I reluctantly concluded I would need to stay in the middle, then the light hit me. I found some VERY profitable techniques on improving notes that made being in the middle an incredibly profitable opportunity. I wouldn’t have it any other way now.