All Forum Posts by: Jay Thomas

@Jay Thomas

South Holland requires a license to lease rentals. The licenses are limited per block based on number of existing rentals. You can only get a new license on a block that’s full when a lease expires/revoked. It’s a sophisticated way of controlling the density of voucher holders.

Your friends can either be equity partners (form an LLC and pool your resources. Your LLC's operating agreement will dictate how and when profits and capital gains get distributed).

Or they can offer you debt financing as a private lender. This blog post explains the financing process (which is essentially the same for bank financing, private money, or seller financing). 

Hi everyone,

My partner and I are looking to start using private money as a financing option for the BRRRR strategy.

We understand the high level concept (how we pay them back, benefits to them, benefits to us, etc), but there are some minor details that we would like to understand better before asking someone to invest with us. 

1. Should we get a proof of funds that we can use when submitting offers? I believe it is common practice to submit a proof of funds when submitting a cash offer. How do we get that from a private money lender?

2. How does the money actually change hands? For example, do they write us a check when its time to close? Do we need to have the money in our account prior to closing? Do we write them a check after the refinance or are they paid by the title company?

I would love to hear how you all are currently using private money, specifically around the questions above. Thanks in advance!

@Jay Thomas

Whether or not you should be treated as a dealer is a very complex issue and is case-by-case.

Here's how to quickly tell your current classification by looking at your tax return. If you're a dealer, the sales of your properties end up reported on Schedule C. If you're not a dealer, the sales are reported on Form 4797 from where it flows to Schedule D.

Keep in mind that this is not some checkbox and not an IRS decision. This is the result of how you entered your information into TurboTax. TT does not give you a lot of control and can still get pretty confusing.

The status is reflected in how you report your income in the return. There are no checkboxes. There is no one answer as there are different kinds of income.

To determine if the taxpayer is a dealer three questions must be answered:

(a) What is the taxpayer's trade or business?

(b) Did the taxpayer hold the property primarily for sale in that business?

The Supreme Court holds that primarily for sale means of “first importance” or “principally” (MALAT V. RIDDELL).

Determining if the property is held primarily for sale to customers in the ordinary course of business is based on the facts and circumstances. Among the facts to consider are the (Ralph S. Norris; Pool)—

i. owner's intent (nature and purpose for which the property is acquired);

ii. The extent of improvements and advertising to increase sales;

iii. number, frequency, and substantiality of sales [this generally is the most important factor (Suburban

Realty Company)]; See (c) below

iv. duration of ownership;

v. continuity of activity related to sales over a period of time;

vi. extent and nature of the efforts to sell the property;

vii. The extent of subdividing and development to increase sales;

viii. use of a business office for the sale of the property; and

ix. character and degree of supervision or control over representatives selling the property

Note: Per court case SUBURBAN REALTY CO. v. U.S: The "holding purpose" inquiry may appropriately be conducted by attempting to trace the taxpayer's primary holding purpose over the entire course of his ownership of the property [Not just time of the sale]

(c) Were the sales ordinary in the course of that business?

Sales are ordinary if they are normal for business, which may be based on their frequency and substantiality

Note: Per court case SUBURBAN REALTY CO. v. U.S: It will remain true that the frequency and substantiality of sales will be the most important factor. But the reason for the importance of this factor is now clear: the presence of frequent and substantial sales is highly relevant to each of the principal statutory inquiries listed above. A taxpayer who engages in frequent and substantial sales is almost inevitably engaged in the real estate business. The frequency and substantiality of sales are highly probative on the issue of holding purpose because the presence of frequent sales ordinarily belies the contention that property is being held "for investment" rather than "for sale." And the frequency of sales may often be a key factor in determining the "ordinariness" question

Note: Per court case TIMOTHY J. PHELAN, ET UX. V. COMMISSIONER: Frequent and substantial sales of real property more likely indicate sales in the ordinary course of business, whereas infrequent sales for significant profits are more indicative of real property held as an investment.

Classification of gain as capital or ordinary is determined property-by-property, based on the statutory determination of whether the property is a capital asset or property held for sale to customers in the ordinary course of business. This means a person can be both a dealer and an investor.