Land Contracts - Who Gets Tax Write Offs
Seller has agreed to 100% owner financing with 3 year baloon. Started out on L/O but did not want to inherit management agreement and wanted to write off maintanence costs and / or morgage interest. Was told by attorney to call it owner financing and transfer deed at closing. This throws the dos flag. Was told by mortg. broker that as long as I recorded it and left the deed and ins.policy in seller's name , I could write off the maint. costs and interest. Now we are not sure about the taxes. It basicly sounds like a sub 2 deal with a 3 year agreement. But I'm not sure about who gets what write offs. I wasn't sure where to post this, seems it would fit in multiple forums but since seller and I both have the cs course, thought I would try here. The seller is also a personal friend who I met through this site so I am going out of my way to make sure he stays protected (no dos). He is offering me this deal as a favor to help me get started. We already have a win/win, just need to work through the tax benefit issues. Is there a standard or does it become a state specific issue? This seems to have sub 2 written all over it. I suppose it's time to invest in Mr. Locke's program and beg for his cell #. ha ha
LarryNut
OK the seller is deeding the property to you so you are the owner of the property and the existing loan is staying in place.
This is a subject to deal. I never have gotten overly concerned about the DOS clause, just make sure the payments are made on time.
However, this is where it stops because you are not looking for a buyer so, I will forward this post over to the Tax Forum and see if DaveT will handle the tax, interest and maintanence costs questions for you.
I would have structured the deal differently knowing what your are trying to accomplish, but let's see what DaveT has to say first.
John $Cash$ Locke
Thanks John. The good part is we just have a verbal agreement at this point. No papers have been drawn up or signed. So we are wide open and all ears for "structuring" suggestions.
Quote: Was told by attorney to call it owner financing and transfer deed at closing. This throws the dos flag.
Was told by mortg. broker that as long as I recorded it and left the deed and ins.policy in seller's name , I could write off the maint. costs and interest.
Now we are not sure about the taxes. Larry,
You have two separate transaction structures in play here. Which one are you going to pick? What about the taxes do you want to know?
In both situations, I assume that you are the buyer and until you say otherwise I will assume that you are acquiring this property for your primary residence.
In the first situation, the deal is structured as a straight sale with owner financing, either a wrap-around mortgage or a Subject To sale, but you don't give us enough detail to know for sure. What are you are doing about the seller's mortgage; are you bringing new financing to the table? As far as taxes are concerned, the seller may have a taxable capital gain. Interest paid to the seller on his wrap-around note is ordinary income to the seller.
The second situation sounds like a Contract For Deed (CFD). The seller retains the deed until the contract is satisfied. A CFD is an installment sale. On an installment sale, capital gains taxes are paid only on the profit actually received, in the year it is received. Interest paid on the seller-financing is ordinary income to the seller for the year in which received. Of course, if the seller is flipping this property to you, then the installment sale tax treatment does not apply.
Sorry to be so generic here, but your question is really too vague to give a definitive answer. At least three different tax treatments could apply to the seller here depending upon how the property is being used. Come back with more details and I will address specific questions for you.[ Edited by DaveT on Date 05/14/2004 ]
I'm sorry Dave for the lack of enough information. No, this is not a primary residence. It is actually (3) 4 plexes that will be noo. The seller's financing will remain in place for three years at which time I will refi and pay him off. I was told by a mortg. broker that if it was a land contract, All I had to do was bring copies of the payment checks and recorded contract and he could treat it as a refi instead of new financing. But that's just it, it's not anything yet. This is one of those rare dream situations that can be structured any way we decide is best. Based on our arrangement, I will get all three props 0 down and cash flow. The seller will also cash flow as well as realize a nice profit in three years. We just need help on what to call it and how to structure it for tax right offs and benefits, for me and/or the seller.
Also John, me finding a buyer for it between now and three years is not out of the question.
I hope this helps. Thank you both
Dave, yes I am the buyer. Also as far as the tax questions:
1. I will be making payments to the seller which he will be using to make his mortg. My payment to him is based on 7% interest. Can I write off this interest?
2. I will have control of props even though seller still has deeds. Can I write off maintenance costs?
3.Property Taxes : I assume the seller would still write those off???
4. Who gets to write off what? Does it depend on who holds the deeds?
I know I'm making this worse.....you're saying is it a contract for deed or is he giving them to me in a sub 2 situation?
I would like to at the very least be able to write off my repair costs. [ Edited by LarryNut on Date 05/14/2004 ]
OK Let us assume this situation. I buy these 3 properties sub 2 the existing financing. The three deeds are put into land trusts with the proper beneficiaries and trustee set up. The current mortgages and insurance policies remain in place. I basicly become the tenant buyer even though I'm not living there. Within 3 years I am to aquire the financing to pay off the seller. Who does the IRS consider the owner and entitle tax writeoffs? I'm starting to feel guilty, seems I should paying for another course to be entitled to this information.
Quote:1. I will be making payments to the seller which he will be using to make his mortg. My payment to him is based on 7% interest. Can I write off this interest?Yes. Assuming you operate these properties as rentals, take the mortgage interest expense on Schedule E.
Quote:2. I will have control of props even though seller still has deeds. Can I write off maintenance costs?Yes. Assuming you operate these properties as rentals, report your repair and maintenance expenses on Schedule E.
Quote:3.Property Taxes : I assume the seller would still write those off?Are you reimbursing the seller for property taxes, or paying the property tax bill directly? If so, you are entitle to the expense deduction. Assuming you operate these properties as rentals, take the property tax expense on Schedule E.
Quote:4. Who gets to write off what? Does it depend on who holds the deeds? Not really. If you are the buyer, you get all the tax benefits of ownership.
Quote:I know I'm making this worse.....you're saying is it a contract for deed or is he giving them to me in a sub 2 situation?This is a contract for deed. The seller retains the deed until you have satisfied the contract. A sale on a contract for deed is an installment sale for tax purposes.
In a Subject To purchase, you get the deed while leaving the seller's loan in place, in his name.
Quote:OK Let us assume this situation. I buy these 3 properties sub 2 the existing financing. The three deeds are put into land trusts with the proper beneficiaries and trustee set up. The current mortgages and insurance policies remain in place. I basicly become the tenant buyer even though I'm not living there. Within 3 years I am to aquire the financing to pay off the seller. Who does the IRS consider the owner and entitle tax writeoffs? I'm starting to feel guilty, seems I should paying for another course to be entitled to this information.Larry, you are describing a Lease Option arrangement. This is not a Subject To deal. Normally, when you become the master tenant in a lease option agreement, you are paying rent to the seller. The seller retains all the property tax and mortgage interest deductions until title transfers to you. While you are the master tenant, your payments to the seller are rent.
If your lease agreement and option agreement require you to pay for maintenance and repairs, then you get those deductions to offset your rental income. Report your income and expenses on Schedule C and pay your self-employment income taxes on Schedule SE.
great post , thanks
Thanks so much Dave. I knew what you were saying about the difference between contract for deed and sub 2. I should have said you were wandering what I was trying to describe. I started out scattering the description and was making hard for you to respond.
His property taxes are escrowed with the insurance and mortgage payment. My payment to him is large enough to "reimburse" him for all of the above. His concern was that he uses the same form to write off the taxes as he does the repairs, so he wasn't sure how he could get one and I the other. You have provided great information and I thank you. I think we are getting very close to where we need to be. He called me this morning to see where we were and I jnformed him it was in your hands. He's not able to get his laptop plugged in but said it was ok to use his name. I'm sure you remember Vern.