Getting Cash Back At Closing
I have gotten over 80,000 back at closing this year, through FSBO purchases, put liens on title prior to closing and financed 100%...
is this an illegal practice and how would i be taxed on this borrowed money i am recieving?
We would need more information regarding the creation of the note and how funds flowed.
the lien was created and recorded prior to closing on the property, bought for 100k and financed 100k, lien recorded for 20k, 80k to seller.....
I'm not an expert but my only thoughts are that the lien is placed on the property to pay for services rendered such as foreclosure consulting or such.
At this point you will have $20k, for example, in sales, and a $20k note.
When you purchase the property and pay off the note for services rendered nothing major happens. You simply move one asset to another asset (the note to the cash account).
It is my opinion as a layman that you'd be taxed at ordinary income rates (schedule C income).
As far as the legalities--I don't have the knowlege to comment.
that is what i figured, thank you
I'm hoping others will chime in because I want to know others' opinions on the legalities.
It would assume to me that a homeowner could argue that this lien put on the property for $20k was foreclosure consulting and that is too much to pay for that. We would be wanting to look for a way to cover our butts.
re Taxes:
If you're taking money out and it's financed money, then it's tax free. It's a loan, after all.
Just like re-financing your won home and taking out equity, the same can hold true for a rental.
Is that the question?
I UNDERSTAND, THE ISSUE IS I WOULD LIKE TO RETAIN THE PROCEEDS TO DEFER FROM TAXES IN MY C CORP, ISSUE IS THIS IS THE BULK OF MY INCOME AND WOULD LIKE TO USE IT TO NOT GO STATED ON FUTURE FINANCING.
Writergig is correct - if you receive cash back at closing and the cash you receive is secured by a note & mortgage, it's treated just like taking a cash-out refi would be on a property. You don't pay taxes on borrowed money it's figured into your tax basis for when you sell.
It is true that proceeds of a loan is not taxable income but you both need to look at the situation more closely:
1. Is is not thewb (the investor) that is taking out the loan. Is it is the homeowner/seller taking out the loan to pay for services rendered....ie foreclosure consulting, etc.
For all accounting, everything must balance. If you look at the transaction, at this point, from the seller's standpoint here it is:
DEBIT: Expense account
CREDIT: the promissory note as a liability
From the investor's standpoint:
DEBIT: the promissory note
CREDIT: Sales****
****At this point there is a taxable event for the investor
Now, at the point the note is paid off, the homeowner/seller does this:
DEBIT: the promissory note (cancels the liability)
CREDIT: Cash
And again the investor:
DEBIT: cash
CREDIT: the promisory note
Now thewb, the investor, can certainly operate his business as a c-corp. Himself, as an employee, of the c-corp does foreclosure consulting and such and makes the company the income described above.
THE QUESTION STILL REMAINS: Is this technique of creating cash at closing this legal?? Realize that the cash at closing is from a totally unrelated transaction from the purchase/sale of the property.