Land Contract = Pay Taxes B/F Getting $

Comments(10)

• 
  nebulousd16th November, 2003

  you can pay on what you received that year, or you can wait until you get paid in full.

• 
  rajwarrior16th November, 2003

  That is not the whole truth.
  
  As nebulousd said, in most cases, you will be taxed on the principal and interest received in that year only.
  
  However, IF you get classified by the IRS as a dealer, or your tax advisor lists you as such (BTW, if he recommends this, find a new advisor), THEN you will be required to pay taxes on ALL your expected income from the sale in the year it was sold.
  
  Roger

• 
  sumtersc16th November, 2003

  I read a post on dealer status recently. What is the real truth. According to the post you can be classified as a dealer after doing only one deal.
  
  What is the maximum number of deals you can do and still claim investor status?
  
  Thanks everyone,
  
  Wes

• 
  DaveT16th November, 2003

  Depends upon what you are doing.
  
  If your primary real estate activity is the Subject To technique with a sale on CFD in accordance with John Locke's methodology, then your activities are dealer dispositions -- even the first one.
  
  You would report your activities on Schedule C and Schedule SE, unless you are conducting these activities within a separate taxable business entity. That local investor is correct. All of your profits are fully taxable in the year of the sale, even if you have not yet received all of your profits.

• 
  DaveT16th November, 2003

  Quote:However, IF you get classified by the IRS as a dealer, or your tax advisor lists you as such (BTW, if he recommends this, find a new advisor), THEN you will be required to pay taxes on ALL your expected income from the sale in the year it was sold.Roger,
  
  For the record, I disagree with your unstated premise that following the Subject To technique in accordance with John Locke's methodology can be treated as an investment property disposition. I maintain that the property is dealer realty, inventory, or stock-in-trade.
  
  Furthermore, if you wait to be "classified" as a dealer by the IRS, then it is too late. By the time the IRS catches up to you, you have probably done quite a few of these transactions. The IRS will recharacterize each Subject To transaction as a dealer dispostion, recompute your tax returns to report the entire profit in the year of sale and then add interest and penalties to the tax bill.
  
  All your installment sale tax treatments will be undone, any 1031 exchange transactions involving these properties will be disqualified, and you risk having your legitimate investment property sales tainted and recharacterized as dealer dispositions as well.
  
  Contrary to your advice, I would run from any tax advisor who suggests that these activities are not dealer dispositions, and instead qualify for capital gains tax treatment.
  
  Now, if you were only referring to the sale of your investment property on the installment method, then I take back everything I just said. Investment property is property held for the production of income or future appreciation (such as a rental property, a second home, undeveloped land, etc.).
  
  However, since this is the Subject To forum, I jumped to the conclusion that the context of the discussion is framed within a Subject To purchase quickly followed by a sale on a CFD.

• 
  rajwarrior17th November, 2003

  Dave,
  
  You're correct IF you are following JL's book AND buying and selling properties quickly.
  
  You'll have to forgive me. I don't always look as to which forum the question is based in.
  
  I'll always defer to you on tax matters anyway.
  
  Roger

• 
  swetbak17th November, 2003

  ok guys, I'm pretty good with the acronyms, but what is CFD?
  I'm gonna die if its an easy one, cause it drives my crazy when someone else asks about one that is either very common or easy to figure out.
  Thanks
  [addsig]

• 
  dbuddha17th November, 2003

  CFD=Contract for Deed

• 
  swetbak20th November, 2003

  Thanks,
  I was on the right track. I was thinking along the Land Contract line.
  
  Question:
  If you took Sub-2 and sold on L/O, then you wouldn't be subject to tax on the sale until the option was exercised, right?
  [addsig]

• 
  sumtersc22nd November, 2003

  From what I understand, that is correct.
  
  The only problem with it is that the people you are trying to sell to still have the option to not buy the house.
  
  They are also less attached to the property and land lording issues may come up in regards to not keeping up with the house. For the same reasons, they are also less likely to improve the property.
  
  Wes