All Forum Posts by: Bill Walston

Ok that makes sense. So here is the scenario:
Current Market Value as of the Lease Option was written in as $247,000(this is a number we both agreed on .. based of an appraisal that was a year old and off of tax assessment.)
Option Consideration was $10,000 (roughly 4%)
Purchase price at the end of the lease is $247,000 minus the option consideration of 10,000 equals 237,000 due at closing.
There is no rent credits tenant just will get equity credit in the form of appreciation IF they exercise the right to purchase the property.
So right now since this was my personal residence for over 5 years. I pay federal income tax on the 10K that I collected in Option Consideration. Then if they purchase this property under 2 years all $ at closing is tax free correct? due to the fact that I lived in the house personally 3 out of the past 5 years. I would just have to recapture depreciation for those 2 years.

Aaron Junck, you pose such an interesting scenario :)

Using your info here, and the fact that you are "referring to owning this property personally for over the past 5 years."

If the option is allowed to expire without exercise: Report the $10K as ordinary income in the year of expiration

IF the option is exercised:

If the option is exercised, the option price is treated as part of the sale or exchange of the real property.

The HUD will reflect a sales price of $247K with a credit of $10K and a net of $237K (before closing costs).

The depreciation must be recaptured. The Section 121 exclusion will apply to the capital gain if the option is exercised within a three year period. (You only have to live in the property for 2 out of 5 years for the exclusion to apply.)

Hope this helps...

2 Votes

Originally posted by John Jackson:

I think you all should arm wrestle...HA!! WHEEEE!!!!

Hey Bill Gulley, John Jackson has a great idea - and I think HE should bring the drinks... ;)

0 Votes

Originally posted by Bill Gulley:

That's a definite plus? What, catch the old man, is that the game?

I think you know that wasn't his intent Bill :)

I concur that "earned" does not have to imply "taxable." I suppose the fact that most real estate investors and small businesses that I work with keep their books using tax accounting instead of GAAP sometimes biases my thinking.

I can do that...IF you can do the same for a "degreed" and certified accountant and a Tax Law Grad who BTW taught accounting (including GAAP and FASB Statements) at the college level to folks who may have turned out to be financiers. :)

0 Votes

Originally posted by Lucas Bonasio:

Surprisingly enough, I found a post from a business law attorney that says the following:

"Yes, NY and every other state recognizes the series LLC. Actually, DE put a name on this type of entity, but it really is similar to setting up multiple LLC's run by one LLC and this is how the states that do not have a series LLC would treat each individual cell/business as a separate LLC owned by another LLC. Cab companies use this type of LLC many times, where one LLC has numerous cabs and each cab is its own entity LLC for protection of the main LLC and the other cabs."

Best,

Lucas

Lucus - What I "THINK" this attorney might mean is that NY would recognize a series LLC formed in a state other than NY, and that's true. The problem is that I (and most others here) firmly believe that the LLC should be formed in the state in which the property is located. So, if your property is located in NY, you're out of luck with a series LLC, as they cannot be organized in NY state.

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Originally posted by Bill Gulley:

Hold on, don't celebrate too quick, your fee must be earned, put it this way:

I buy your option, I go to the seller and he refuses to sell or can't sell with clear title under the terms you sold me.....yes, I have a claim against the seller/owner, guess who else I have a claim against for giving me a bogus option, one that was not honored or enforceable? You can call it non-refundable but that doesn't mean you may not have to refund it. Now, if the term of the option expires, go spend the money, if I fail to buy and the seller was willing, go spend your money, you upheld what your obligation which was, to assign to me good rights to purchase under those terms.

Now, if you sold an option saying it may not be operable as agreed and the buyer accepts any costs of enforcement.....well, you might get past that, but who would buy an option like that?

You can keep the option price, but it's not earned until the option is taken and the asset is purchased or the term of the option expires.

True Bill, but only in the case of a sandwich lease option where you stay in the deal.

The IRS takes a different view an option fee when you make an assignment. Once you assign the option you are an assignor, not an optionor. It is not an option fee (in your hands anyway) but an assignment fee. It is taxable in the year you receive it. IF something happens and a court finds that you have to pay back the assignment fee, then it's an expense in the year that you pay it back. This is the same thing that would happen in a wholesale deal where you assign your contract. You report the assignment fee in the year it's received, and if you were to get sued because the seller doesn't perform and had to repay the fee you would deduct the expense in the year it was refunded.

2 Votes

Originally posted by Aaron Junck:

thanks, so if I understand correctly the "funds received" need to be deposited and cant be touched until the L/O is executed or terminated? Or since it specifically states that it is non-refundable it does not need to be and can be used to invest more??
I understand that the tax is due when it is exercised or expired but what are the funds doing for the timeframe between that all?

Aaron - Short answer: the non-refundable option consideration is yours. You may use it as you see fit.

Contrary to some opinions, my belief is that if you ASSIGN your lease option (whether to the seller or the tenant/buyer) the option consideration then becomes an assignment fee (to you) and should be reported for tax purposes in the year of the assignment.

It you do what's known as a sandwich lease option and you stay in the deal, the option fee remains 'as is' and would be reported when the option is either exercised or expires.

Hope this helps...

0 Votes

Originally posted by Lucas Bonasio:

I have 10 multi-family buildings, owned by my "X" LLC. If a tenant from one of the 10 buildings sue me for any reason, his claim would have "access" to all the LLC's equity, represented by the 10 buildings I own under that LLC.

Now, if I have 10 multi-family buildings, each of them owned by a different "X", "Y", "Z", etc LLC (i.e. I would have 10 LLCs). If the tenant of one of the buildings sue me, then in this case his claims would have access only to the equity of one of the the buildings, since the LLC that "owns" that building only "owns" ONE building.

Is this correct?

That's correct. That being said, I tend to agree with Bill Gulley about the "one property - one LLC" theory. I think the costs WAY outweigh the benefits. I look instead at the amount of EQUITY in the LLC.

In your case, I'd suggest having your properties in one LLC and purchase a good liability policy.

And just a note, NY is not one of the 10 states that allow the formation of a series LLC.

Hope this helps :)

2 Votes

If the property is going to be placed in the LLC then the LLC should be formed in the state in which the property is located - in this case, VA. In most states you will need to have a physical address, so you will probably want to use your parents' address. (I don't think you want your LLC mail to be going to your rental property.) Using their address will also mean that you won't have to pay a registered agent.

2 Votes

Originally posted by David Krulac:

The high tax rates is one negative to doing flips. In the highest tax bracket, now 39.6%, and add on the 3.8% health care tax, and add on the state income tax, as high as 13% in CA and add on the social security tax, you could be paying what 68% of your profit in taxes on a flip at the high end. WOW!
.......

Nice analysis David. One observation however... the 3.8% surtax on net investment income doesn't apply to "flips."

0 Votes

Originally posted by Steve Might:

Kyle, at what point does this occur? I am sure you are right and I appreciate the help, but do you have a source for that? Thank you.

Steve Might, Kyle Meyers, is exactly right. IRS PUB 527 (Residential Rental Property) says, in relevant part, that "you begin to depreciate your rental property when you place it in service for the production of income."

They use the following example to further explain "placed in service" =>

Hope this helps :)

0 Votes

All Forum Posts by: Bill Walston

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