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Guest Diver

Masked Sale

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Guest Diver

Hi Gang, I've been trying to convince a guy to use my services CA assignment deal. He says he's got other people wanting to do the same thing. I don't believe him though. Anyway he says he's been reading about lease option on the net and is concerned it might be called a Masked Sale according to IRS. I thought about telling him that its a scare tactic used by my competion. What do you think? Thanks, Diver

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The "guy" you are talking to is probably referring to a "disguised sale". This is most often an issue with partnerships when a partnership interest is transferred to a partner or interests are exchanged between partners.

 

In your case, the last thing you want to do is to present yourself as a tax professional, if you are not in fact a licensed tax professional. You could always offer to explain the structure of your deal to the "guy's" tax advisor and get a professional opinion.

 

However, if your "guy" is throwing up objections like this, he is not a motivated seller. Leave your card in case the "guy" changes his mind later, move on to the next deal.

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The "guy" you are talking to is probably referring to a "disguised sale". This is most often an issue with partnerships when a partnership interest is transferred to a partner or interests are exchanged between partners.

 

In your case, the last thing you want to do is to present yourself as a tax professional, if you are not in fact a licensed tax professional. You could always offer to explain the structure of your deal to the "guy's" tax advisor and get a professional opinion.

 

However, if your "guy" is throwing up objections like this, he is not a motivated seller. Leave your card in case the "guy" changes his mind later, move on to the next deal.

 

An Arizona judge who wrote the state's Landlord/Tenant laws said this in a court case:

 

Here are five things that may violate the law or cause the court to classify the transaction as a disguised

sale.

 

1. Collection of more than 1.5 times the monthly rent as an Option Deposit.

 

2. Collection of an Option Deposit or Rent Credit to be credited to a Purchase or to discount

the Purchase, as in a Down Payment.

 

3. Pre-Determining an end Purchase Price as in delaying or disguising a sale.

 

4. The Leasee also holding an Option on the same property in which they are leasing

regardless if it is one document or two separate documents.

 

5. The Leasee being responsible for maintaining the property.

 

 

An investor acting as an equity purchaser buys a property and leases it back to the seller with an option to buy. The transaction is not a genuine lease option: it is a real estate loan. The lender, who characterizes himself as an investor/buyer, in this case holds the grant deed to the property as security for repayment of principal and interest, rather than using a trust deed to document the transaction. [CC1695.12]

 

When a lease option is a masked land sale contract, the tenant with a purchase option becomes a buyer with equitable ownership of the property - equitable because he is in possession of the property and makes the payments, which applies in part against the purchase price, but has not yet received the deed. [Mc Clellan

v Lewis (1917) 35 CA64]

 

The landlord in fact becomes the carry-back seller in law - secured with different rights than an owner - even though me may retain the title. [LA Invest. Co. v Wilson (1919) 181 C 616]

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Yowser! Glad I don't live in AZ, or I would be scared s******s to attempt to do a lease option deal. All kidding aside, however, I notice that you write "here are five things that may violate the law or cause the court to classify the transaction as a disguised sale." And by "court" I assume that you mean an AZ court, since this was written by "an Arizona judge who wrote the state's Landlord/Tenant laws." Please correct me if my assumption is wrong.

 

Well, I may step outside and get hit by a Mack Truck, but that isn't going to keep me inside all day. I think, even if I lived in AZ, I'd take my chances. Firstly, for an AZ court to even attempt to classify a lease option deal as a "disguised sale," the contracts would first have to be brought before the court. What are the chances of that happening? Secondly, IF in the unlikely event the contracts were brought before an AZ court and the transaction classified as a "disguised sale," what is the worst that could happen? That the tenant/buyer be declared to have an equitable interest in the property and you have to foreclose instead of evict? (And I'm assuming that the reason that you are in court is to get the t/b out of the property for non-payment, but I could be wrong. Feel free to correct my assumption if you wish.)

 

By the way, I see that your supporting cases, interestingly enough, are California cases, both of which are more than 90 years old and both superseded in the very state in which they were ruled upon. I know SEVERAL California investors who do lease options every day.

 

But this is just my .02 - yours may vary :-)

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Bill, I agree. You can choose to operate in fear, looking over your shoulder. Or you can enjoy yourself, do your deals honestly, and run your business. I opt for the latter.

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Michael, since you've been operating in Florida, I will tend to follow your lead. Have you ever had a legal issue or ever been challenged ?

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Michael, since you've been operating in Florida, I will tend to follow your lead. Have you ever had a legal issue or ever been challenged ?

No, I have not. And I never give this concern a moment's thought.

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