OK...Need Experts....Can I Keep This Tax Problem Simple?
My wife and I are working on having app. six mobile home/land combos that we will be selling on LC/CFD.
The basic premise is to buy dustressed or out of state owned mobile home lots with clear titles. Buy mobile homes from lenders and set up on these lots we have bought below market value. Do rehab and spruce up and then sell total package on land contract for something like $2500 down, 12.5% interest on a 20 year term. Payments on each note would be in the $300-$400 range. We will pay the property taxes ourselves. The property will remain totally in our name and the insurance will be paid by the buyer with us as "co-payee" on the mobile home. Mortgage deduction for IRS is irrelevant for most of these buyers anyway.
Do these properties need to all be quit claimed to an LLC and if so what tax implications will that have? We currently own them all outright or will when the business "begins".
OK, with that said, my main problem is to structure these to avoid huge taxes. Why can we not simply treat this income that we receive ,( in app. $300 monthly payments, times 12 months times 6 properties), every year at tax time as "regular income" and when the properties are paid off, (in 20 years or earlier if the buyers are motiviated), then we could simply sign the deeds over and hand them to the buyers? Is this legal? It sure would simplify the deal even if we do have to pay at a higher "personal income" rate. Since we would pay taxes at regular income rates for the 20 years we collected them, would we still owe capital gains or a "transfer tax" as I have read about? Would these properties being in the name of an an LLC affect this above scenario whatsoever?
By the way, I am in Tennessee and apparently Tennessee is a much more lender friendly state than many of the other states that I have read about on this forum as far as evictions, buyer LC equity and terminations of LC/CFD's.
Any advice? Tell me where we are wrong and what to do to fix it...
Not to answer your question but you should be able to get more than 12.5% on the land contract sales. It is commonplace in my area for mobiles to be financed at 16-21% interest....18 being the most common.
The transfer tax you ask about is governed by your state law and probably collected by your county treasurer. Inquire at your courthouse to get your question answered.
How much did you pay for the house?
How much did you sell the house for? After all expenses of sale, how much did you actually get before you paid off any loans or mortgages?
Your taxable profit is the difference between the amount you actually got and the amount you paid for the house.
For example, let's say that you paid $10K for the property a year ago and owned the property free and clear. Let's say that you had a contract to sell the property for $25K but the contract stipulated that you will contribute $5K to the buyers downpayment and closing costs. Let's say that the seller's closing costs amounted to $1000. At the settlement table, you receive $19K ($25K minus $5K minus $1K).
Your net sale proceeds are $19K. When you subtract your purchase price of $10K, your taxable profit is only $9K. It does not matter to the IRS that you had to borrow the $5K you paid on the buyer's behalf, because that amount is not charged to your taxable profit anyway.
If you walked away from the settlement table with cash in hand, I don't understand why you had to bring money to the settlement in the first place.
We sold the house for $85,000 and owed about $53,000.
We were told we had to bring the cash in for the buyers down payment. We brought in a money order for $4250. We thought it would be taken out of our funds, but it couldn't.
The buyer had no money to put down, couldn't even add the closing costs into the loan because it would go over the appraisal amount. So we were told we were paying that too! But not sure how we paid that, though.
We walked out with a little over $19,000 but instantly had to pay back my father for the $4250 he loaned us to pay the buyers down payement, plus all the other loans we had to pay back. We ended up with about $8000.
If the "other" loans were not part of the cost basis of the property you sold, then it appears that your taxable profit is about $14750 -- the $19K you netted from the sale proceeds minus the $4250 you contributed to the buyer to facilitate the sale.
The fact that you used some of your sale proceeds to pay off other loans does not reduce the taxable profit you made on the sale.
Most of the money we owed back to family was money they loaned us to help pay the mortgage on this investment house.
It was the worst thing we ever did. Never again.
Look on the bright side. You had a valuable learning experience AND still made a profit.