The Ultimate Subject To Accounting Guideline
I need help understand how to account for, and pay taxes on (and when I pay them) profits made while purchasing properties Subject To and selling on a CFD with a 2 year balloon.
1. Assume $100,000 mortgage that we are subject to
2. Sold on CFD with 2 year term
- $10,000 down
- Sold by CFD on two year term with an interest rate 2% higher than the underlying mortgage resulting in a $200 per month cashflow.
3. In two years, buyer refinances, pays off underlying mortgage, gets deed and leaves me with another $15,000 in backend profit
How are each of these components taxed assuming the property is placed in an LLC with 2 members (capital gains or income)?
In what year are we responsible for the taxes?
Are any tax attorneys or accountants reading this doing subject to investing? How are you handling it?
TIA
[addsig]
Simpler version:
Do we pay tax on the entire profit in the year we sell it, or only the cash we receive each year?
[addsig]
According to some much earlier posts by Dave T in this forum, your transaction is a flip and as such is a "dealer" activity.
This means that all of your profit is taxable in the year of the sale (the year you entered the CFD). Interest received is taxable in the year in which it is received. Report your income on Schedule C and Schedule SE.
I would give you a direct link to the posts, but the forum search feature is not enabled for me.