Seller-financed IRS reporting

[Dan R.]

This is a question for my accountant, but since he's on vacation this week I wanted to see if anyone has had a similar experience. Here's my dilemma: I have struck a deal for a seller-financed acquisition of a mobile home park. The owner wants a guarantee that my payments to him (and his interest income) will not be reported to the IRS. In fact, he wants the monthly payment in cash. Does anyone know the borrower-buyer's IRS reporting requirements in this type of deal? The seller is retired and is not in the lending business. As currently structured, the annual interest would exceed $600. Under another deal structure he is agreeable to a 0% interest rate, but I'm not sure if that would be viewed as reasonable under an audit. My goal is to meet his wishes, do the deal, and stay in full compliance with IRS regs.

Thank you.

Dan

[Bill Gulley]

Are you seeing any advantage here?

You'll have a contract, be very careful not to agree to do anything illegal in your contract that could void the deal.

My prescription for a cheat is to give them enough rope to hang themselves.

You can state that "the buyer shall not have any obligation to report any principal or interest payment made to the seller, nor shall the borrower deduct any interest payment for tax purposes" All true. I'm very opposed to doing zero interest notes, but not in this case, if it's zero you won't have any interest deduction expense making your statement true.

It's not for you to explain to the seller that the transaction must be reported by any title/closing agent. Make sure he agrees to an insured closing with you receiving title insurance, naming a title/closing company isn't a bad idea!

I'd ask him to think about cash payments, obviously he's been collecting rents in cash and cheating is my guess. It also sheds light on the tenants you may get. The logistics will be difficult. If he requires cash, I'd make him come pick up the payments and if he fails to pick up any payment by a certain date you won't be in default. Have your attorney draft the note with this waiver of default.

He'll likely blow up at closing when he has to turn over his tax number to the closing agent. You or they can explain that the sale price will be reported but not the payments, as sly as he seems to be he may think his out is saying he didn't get the payments thereby not owing anything. The IRS doesn't get the note terms.

If he refuses to close you have him on a valid contract, he won't want to go to court for performance, nothing personal, it's just business.

If he closes he can come by personally and pick up his payments, I'd bet he gets tired of that. Someday the old guy will be sick or have some other reason he can't get over there to pick up his cash. It would be a good time to modify your note for a payment by check.

Within 3 or 4 years I'd say the IRS will get involved in an audit. Depending on his tax activities the IRS should see that there has been no payment on the transaction. In the end, he'll probably get hit with tax fraud besides that imputed interest, interest and penalties. You know, if he gets some jail time he can't pick up his cash payments either! You will owe it, but I guess it will take months for him to arrange for someone to get a power of attorney to pick up payments.

Those could be the issues when you get so smart thinking you can out smart the system, plenty of rope.

Or, you could explain the error of his ways and negotiate a better deal. :)