Tax Implications Of Failed CFD
I didn't want to hijack the other thread dealing with "dealer status" and cfd's, so I'll post this here.
By the way, Dave... great explanation of the tax implications. It helped simplify things quite a bit for me.
My question is: What happens if the deal never completes? I'm not very familiar with CFD, but what if they pay for a year or two, but don't ever get other financing, or whatever they need to take you out?
You've already paid up front for the taxes on the profit, right? But you didn't receive all the profit. Did you receive any? What happens here? What are the tax implications?
This above unanswered question fits my situtation nearly exactly..
Wouldn't you know it...This would be the one question that no one bothered to answer. Any ideas on this one?
It just does NOT seem right to be forced to pay taxes on profits that are not yet seen , may NEVER be seen and even if completed, wouldn't be seen for 19 more years of a 20 year note. This is the only place I have ever heard this. Is this true? I thought if a property were purchased as an "investment" and sold on a CFD/LC, then it was payable in installments as received from the buyer?
Yes...No?
When you "repossess" a property, the amount of profit for which you have already paid the taxes is added to the basis. When you sell again, your new, higher basis shields the original profit from taxation again.
Quote:I thought if a property were purchased as an "investment" and sold on a CFD/LC, then it was payable in installments as received from the buyer?
Sevensteps,
You are correct, investment property sold on a CFD gets installment sale tax treatment.
Without going back to see the original thread, I am assuming that the discussion focused on the tax treatment of the CFD that is deemed to be a dealer disposition. In this instance, the property sold is not investment property, but rather merchandise to an active income business.
Profits from the sale of merchandise are fully taxable in the year of the sale and treated as ordinary income (not capital gains). Merchandise is not eligible to participate in a 1031 exchange, not eligible for installment sale tax treatment even when sold on CFD.
How about CFD (Land Contract here in Ohio) buyer that doesn't end up following through on the sale of your personal residence?
In other words, say I'm selling my personal residence and wishing to take advantage of sec 121 capital gains exclusion on sale of primary residence. You get in a land contract (which of course qualifies as a sale) but, before they default. Is there an IRS pub that addresses this issue. Anyone have thoughts on how to handle?
Section 1038 of the tax code covers your situation and the language is rather complicated.
Basically, when you reacquire your former personal residence that you have previously sold on an installment sale, you have up to one year to resell the property with no tax impact -- the previous installment sale is voided and the IRS pretends it never occurred. Wait more than one year and more complicated rules and formulas are in play.
Just my opinion.
Thanks NewKid for the reference.
You nailed the right IRC section.
http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=a03553a2d1f309f5d57a7759a821dd73&rgn=div8&view=text&node=26:11.0.1.1.1.0.3.70&idno=26
If it were me, I'd keep the balance above 20k or find a new lender.
Best of luck,
Andrew
Hyundai ...and you would lose more money. Paying 4.5% inerest on that $20,000 = $75/month instead of a $20 fee (not a good decision). Changing lenders is also nearly impossible since the HELOC I have is Prime minus .75% (4.5%) with 90% LTV. I"ll never find anything lke that.
You don't tell us what you did with the proceeds you received from your rental property HELOC. Whether the interest is deductible or not depends upon how you used the loan proceeds.
A home equity loan on your personal residence is treated differently. The IRS will allow a home interest deduction on Schedule A for a $20K HELOC without regard to how you used the loan proceeds.
I purchased the property with the proceeds.
The property I'm renting out was $140,000 and I borrowed $140K temporarily to purchase it. I then got a HELOC on it to pay back the temporarily borrowed $140,000. So ALL of the $140,000 HELOC was borrowed to own the property.
So, you are taking out a $20K equity loan on your personal residence to pay down your rental property loan by $20K. Is this about right?
You want to know if you can deduct the interest expense on Schedule E instead of Schedule A. The answer to your question is yes, as long as you can trace the loan funds to the rental property, or to improvements made to the rental property. If this is the case, take the interest expense on Schedule E.
In the final analysis, whether the interest deduction is taken on Schedule A or expensed on Schedule E should not change your total tax liability unless you don't itemize deductions or your Schedule A deductions are capped.
I refer you to IRS Publication 535, page 18, Loan refinancing.
This section says to "Allocate the replacement loan to the same uses to which the repaid loan was allocated. Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan."My inference here is that the loan interest is allocated to the rental property and therefore is expensed on Schedule E.
Best to confirm this with your tax professional.
[ Edited by NewKidinTown2 on Date 01/12/2005 ]
Wow, ...hard core!
Thanks a lot NewKid!!
So, you're saying that if you get a HELoC on your primary residence and use it in your property investment business, that you can write off the interest on sched E. I don't disagree with that but doesn't this only hold if you hold the inv prop in your own name or your own single member LLC??
But....what if you take out a HELoC (in your own name using your personal credit profile) and you are a member of a multimember LLC and you use the proceeds from this loan to fund property purchases of the LLC? You would effectively be making a contribution to the LLC since it's not the LLC that is taking out the HELoC, right?
So, wouldn't I have to account for this transaction as,
A) a loan from the lender to me and then
B) as a loan from me, individually, to the LLC.
I would have the LLC make the interest payments to me personally and then turn around and make the same payment to my HELoC lender. So, wouldn't I have to report this as interest income from the LLC as it pays me back. Furthermore, I would need to report the interest expense charged on the HELoC.
I think this is all in the realm of "self charged interest". Am I right about all of this? Is anyone familiar with the "self charged interes rule". I'm sure other people out there have done this type of transaction before.
Thanks for any insight NewKid and others.
Erick,
Interesting problem. Here is my layman opinion for what it is worth.
You use the proceeds of a HELOC on your primary residence to invest in something other than real estate. Let's say you use the money to make a loan to your LLC and charge interest at least as high as your borrowing cost.
The interest you pay on your HELOC is called investment interest and is a deductible expense on your Schedule A as a Miscellaneous Deduction. Of course the 2% limitation comes into play and your deduction may be limited by your actual investment income.
The interest paid by the LLC on the money borrowed from you is treated that same as any business interest expense. If used to purchase rental property, the interest is expensed against rental income and net passive income (or losses) flow back to you as reported on the partnership K-1.
The interest income you receive from the loan to your LLC is reported as interest income on your Schedule B.
Just my non-professional opinion. Consult a professional tax advisor to confirm the correct tax treatment should you be in this situation.
Ok, here's a little more info on this topic. The code section dealing with this is 469. This site discusses the situation pretty clearly.
http://www.nysscpa.org/cpajournal/old/11356686.htm
It's a tough concept at least for me to grasp and I need to read it about three times to refamiliarize myself with it. Now, I'm just trying to figure out how to reflect this transaction in the tax forms. The 8582 instructions talk about it (pg5) but I don't find them specific enough to help me complete the forms. And, when you call the IRS which I've done several times on this topic, they're not well-versed on it either.