Is This Legal With A Land Trust?
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"
This seems to be a little overly optimistic with 100% deductions being given for 10% beneficial interest and only an option agreement. I am not sure it would stand up in court as equitable interest..
[addsig]
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