All Forum Posts by: David M.

@Will B.

That's a tough one.  I find that its different for me each time because of various other circumstances of my financials.  Also, the IRS for some reason doesn't provide instructions on this matter.

Just to cover some basis...  You are doing form 4797, right?  That sends you back to SchD with your recover values.  From there, usually on the 2nd page you wind up on one of the worksheets.  so, the calculations are "off form."

Its also really convoluted since the gov has the concept that it can't tax you at a higher rate than your current rate.  So, if you are in the 24% marginal tax bracket, the depreciation unrecapture will be at 24%, not 25%.

There is probably one small "interpretation" issue that you are having with the worksheet.  i find them to be very "tricky."  Just have your return done professionally and then you'll see how its done for future use, in this situation.

Sorry.

@Myeasha Jones

"less a person injects into the deal?" just means if the person/investor puts up less money.  Basically, they are borrowing more...  For example, a "zero" amount a person "injects" into the deal would be if they borrowed 100%-- 100% ltv.  This is similar to saying a person/investor has no "skin in the game" --- they never put up any of their money.  They can just walk away from the deal and disappear.  They don't lose and money since they never put anything up.

@Gordon Harris depends on what you are doing... LLC may expose you to SE tax, but only if your income is subject to se tax... Again, if you are just renting, than having a LLC doesn't create any SE tax implications, by itself.

@Jack Martin

really?  "...whatever unused portion remaining is not subject to recapture..."

I believe once you take the depreciation, its depreciation subject to unrecapture.  If you have nothing to offset the depreciation, its carried forward as PAL --- one reason why 1031's are sometimes oversold in my opinion.

While one may consider the PAL and the depreciation unrecapture to offset each other, it doesn't always work that way.

@Jacob Wohlgemuth

After two years of using it as her primary then she is eligble for the sec121 exclusion.  So, wait to close after May6th.  Being single, she is eligible to exclude up to $250k of capital gain on her primary residence as mentioned.

1031 exchanges are only available for investment properties.  Since that is her primary, its not eligble.

You mentioned in your OP about "moving" money to avoid capital gain...  Many have this notion that by "reinvesting" the proceeds that somehow avoids capital gains.  Unfortunately, it doesn't work like that.  If you realize profit, sales price - purchase (and some adjustments for closing costs and capital improvements), you have taxable income.  Just because you "spend" the money on another property doesn't change the taxable profit, in short.

Good luck.

@Steve K.

https://www.biggerpockets.com/forums/311/topics/1181525-spre...

Doesn't anybody realize that this thread basically shows how the seller gets shafted?  Yeah, its supposed to show how "great" a sub-to deal is for the buyer.  But, the start of this deal is comparing how the deal work so to convince the seller into a $332k price instead of $400k...  Yeah, investors have no fiduciary duty...

And they say Realtors suck when they are still trying to get the highest and best for their clients...

@Roger West You should have no problem getting a construction-to-perm loan.  Although, I think you'd have to buy the land --- you usually don't get anything for buying land, at best 50/50.

@Davit Gharibyan who are your “tax pros?”  Actually lawyers and accountants??

@Davit Gharibyan

I still don't see a reason to incorporate...

Sure, having a pair of single member LLC's, or even multi, doesn't change your taxation since they are pass through entities.

However, its been discussed many times about your setup providing some segmentation of the liability since the Mgt LLC is doing the lease (you'd create a PM-type contract between the Title holding entity and the mgt LLC). the Mgt LLC becomes the landlord, and the Title holding entity is basically fallow (except annual funds transfers since the Mgt LLC has to payout to its client sometime for a legality I think).

LLC's have employees. MANY major corporations are LLC's.

In some ways regardless, you should make sure your mgt LLC is properly licensed and insured. If you want to expand it to service others, it doesn't make sense to incorporate.

Hopefully you have competent tax professionals...  I know many layman equate the "disregarded" status by the IRS to also the corporate veil.  The "disregarded" status is just a tax status by the IRS which in practice means they didn't create another form.  e.g.  partnerships have their 1065 and C Corps have a whole another mess of files (don't know the number).  

Furthermore, electing to be taxed as a C Corp entirely changes your taxation, usually for the worse.  Oh, and are they suggesting you elect to be taxed as a C Corp?  Or, actually form a C Corp entity?  If the former, that's just stupid in my layman's opinion since its a taxation status, not an entity change.  If the latter, as mentioned I still don't understand why and you'll also incur so much expenses in operating the C Corp including getting a Board of Directors!

Good luck.

@Steve K.

I'm not sure if its new...  Certainly increased given the market conditions and the advertising its increased.  Maybe its part of the nonprime space as well as the subprime.

I think it might find itself in some strange grey area, because of lack of knowledge or sophistication.  I thought owner-occupied Notes were trading well, but had double digit yields.  If I understood the Note market space better, I could see if seller financing at ~10% and after seasoning sell off the Note.

Yet, people are doing such a wide range of single digit yields.  As mentioned, some people, be they investors or just owners, see how great it would be to generate what they think is a steady income -- just with a huge counterparty risk if they are extending credit to a nonprime or subprime borrower...

As mentioned, using this strategy when you don't have the resources and/or credit to back this is a recipe for a bunch of disasters.  No one really advertises this, but you do and can lose money investing in real estate.

Perhaps when there are more defaults, etc that hit the mainstream media, the risks will become more apparent.  Otherwise, I think the main issue is "creative financing" still requires "desperate" sellers, those that have a particular massive "pain" that just needs to be relieved in anyway.  I find it kinda sad this occurs instead of getting the best/highest value out of their property, at least sometimes I figure.

@Marcus R. You asked about the benefits of this to sellers:  I'd just like to add that sometimes, depending on your financial situation/history, outright selling sometimes doesn't have the huge tax hit "they" keep telling you.  I've been tracking/waiting for over 20years now that I'm liquidating my portfolio.  So, sometimes the "benefits" are from ignorance.

Additional "ignorance" is the seller, especially an investor, is really a one-trick-pony, for lack of better term, and only knew how to invest in real estate rentals.  So in the case of a "tired landlord," if you offer them 6%-7%, perhaps, they jump at it because they see it a good return.  They don't realize, or can't consider investing in any other asset or asset class and see a similar or better yield/return  --- I guess kinda a pet peeve of mine.

So, in reality I don't see seller financing helping the seller sometimes, in the grand scheme --- but it maybe the best they know how to move forward.  Meanwhile, it entirely benefits the buyer while pitching how much its helping out the seller.... (sigh)