Have You Heard Of This?
I recently received an email from an investor in our group that had received the following information from another investor.
Purportedly using this system a person leasing the property with and option to buy can claim interest deductions as well as other deductions as long as they are a 10% beneficial interest.
I have an atttorney and tax guy that says "Nuts" but I am wondering if you have seen this before and if so do you have any experience with it?
Randall,
"The resident beneficiary of the land trust with at least 10% ownership is entitled to a deduction of 100% of the loan interest and property taxes as outlined in IRC# 163(h)(4)(D) Re Special Rules for Estates and Trusts.
This section of the IRS code also allows a non-resident investor beneficiary to deduct 100% of the depreciation and other expenses.
So you can set up an Illinois type land trust with 3 beneficiaries. The Settlor Beneficiary who is the original owner who transfers their property to the trust and retains a minimum of 10% of the beneficial ownership so that the Due On Sale clause is not violated as stipulated in the Garn St. Germain Act.
A minimum of 10% of the beneficial ownership is allocated to the new tenant ( the Resident Beneficiary) and they are entitled to deduct 100% of the mortgage interest and property taxes thus enabling you, the investor, to charge them higher rent. You would also have an Option to Buy agreement with this tenant.
You, as the Investor Beneficiary, would be allocated the remainder of the beneficial interest in the trust (that is 80% or whatever % split you negotiate with the Resident Beneficiary) and you would be entitled to 100% of the depreciation and certain other expenses.
I see a few ways to profit from this structure. Higher monthly cash flow because the tenant rent is higher. No property costs annually because the tenant considers themselves as an owner and pays any costs of improvements. Tax deductions for 100% of depreciation and expenses (say you pick up $5,000,000 of real estate in a year… your depreciation expense is $150,000.) Participation in the appreciation of the value of the property which you realize when the tenant buyer actually buys the property. And you have very little at risk"
An interesting concept but it seems a little shaky where they are allowing 100% deductions with 10% beneficial interest on a lease agreement.
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"Chance favors the prepared mind..."Louis Pasterur & Randall Wall 
Randall Wall
[ Edited by Stockpro99 on Date 01/10/2007 ]
This is exactly what mtnwizard has been talking about all this time...
Chris
I would love to hear something from another source
[addsig]
The local investor that brought that to me claims to have gotten it from Bill Gatten (or one of his affiliates).
I am not planning to use it soon in any event and the feller that is doing it in Salt Lake City is charging 1% of the pruchase price to do a land trust for people with this in it..
[addsig]
They generaly care to the point that they can track the deductions.
Using this hair brained scenario you could write of 200% of the available deduction and everyone would have their fingers in the pie.
[addsig]
I have trying to research using Land Trusts here in Michigan. So far, I have have struck out with anything promising from two very experienced RE attorneys and one very knowledgable investor. So far, I have been told that the Illinois Land Trust, is not recognized in Michigan.
What I have been skeptical of is.... why are there so many "experts" that claim that Land Trusts are not valid. If there is case law for Land Trusts, RE Attorneys and other investors would be widely using them... not just a few self proclaimed esperts. However, I am still seeking whether or not LT are recognized entities in MI.
I have no issue with land trusts at all. They are legal in all 50 states and have been around for a very long time.
They are not meant to protect anything. They are meant to keep your name and ownership out of site.
I closed over 90 transactions last year and yet my name does not appear on the county records anywhere....
The purpose of this post was to address the tax issue.
I have since heard that this has been challenged in several cases and that you need deep pockets to fight it in the very best of circumstances.
I would suggest keeping your distance from it..
THIS IS JUST MY OPINION.
The original post stated:
"The resident beneficiary of the land trust with at least 10% ownership is entitled to a deduction of 100% of the loan interest and property taxes as outlined in IRC# 163(h)(4)(D) Re Special Rules for Estates and Trusts.”
I believe that:
If the terms of a trust establishes that the real property contained therein, is the principal residence (within the meaning of I.R.C.§ 121), of a beneficiary of said trust, then according to I.R.C.§ 163(h)(4)(D) said residence shall be treated as a qualified residence of such trust.
And since a trust is a pass through entity, the resident beneficiary shall be allowed as a deduction all (100%) interest paid or accrued within the taxable year on indebtedness, allocable to his ownership interest. I.R.C § 163(a)
The original post stated:
“This section of the IRS code also allows a non-resident investor beneficiary to deduct 100% of the depreciation and other expenses.”
I believe that:
Notwithstanding interest, the non-resident investor beneficiary is allowed to deduct 100% of the depreciation and other expenses allocable to his ownership interest. The amount allowed as a deduction for investment interest for any taxable year shall not exceed the net investment income of the taxpayer (non-resident beneficiary) for the taxable year. I.R.C.§ 163 (d)(1)
Any amount not allowed as a deduction for any taxable year by reason of I.R.C.§ 163 (d)(1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year. I.R.C.§ 163 (d)(2)
The original post stated:
“So you can set up an Illinois type land trust with 3 beneficiaries. The Settlor Beneficiary who is the original owner who transfers their property to the trust and retains a minimum of 10% of the beneficial ownership so that the Due On Sale clause is not violated as stipulated in the Garn St. Germain Act.”
I believe that:
Sure, a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property, will not trigger the Due On Sale clause. U.S.C. §1701J-3(d)(8)
The original post stated:
“A minimum of 10% of the beneficial ownership is allocated to the new tenant ( the Resident Beneficiary) and they are entitled to deduct 100% of the mortgage interest and property taxes thus enabling you, the investor, to charge them higher rent. You would also have an Option to Buy agreement with this tenant.”
I believe that:
The resident beneficiary is allowed as a deduction all (100%) interest paid or accrued within the taxable year on indebtedness and other expenses, allocable to his ownership interest. I.R.C § 163(a).
The original post stated:
“You, as the Investor Beneficiary, would be allocated the remainder of the beneficial interest in the trust (that is 80% or whatever % split you negotiate with the Resident Beneficiary) and you would be entitled to 100% of the depreciation and certain other expenses.”
I believe that:
Again, notwithstanding interest, the non-resident investor beneficiary is allowed to deduct 100% of the depreciation and other expenses allocable to his ownership interest. The amount allowed as a deduction for investment interest for any taxable year shall not exceed the net investment income of the taxpayer (non-resident beneficiary) for the taxable year. I.R.C.§ 163 (d)(1)
[ Edited by Darryl-CA on Date 01/15/2007 ]