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Dave T

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About Dave T

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    The Tax Man

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  1. Assuming the seller's holding period for the property in question is greater than one year. If the option is exercised, the option consideration the seller has already received is added to the proceeds of the sale. The difference between the seller's net proceeds on the sale and his/her cost basis is the seller's long term capital gain. If the option expires worthless, the option consideration is recognized as a short term capital gain.
  2. In my opinion, yes. Rent credits can be accrued as a deposit against the purchase price when the option is exercised, or, become additional rent when the option expires.
  3. Bill, I have some reservation with your interpretation of the new §121 rules and the exceptions for periods of non-qualified use. I believe the intent of the exception is to recognize that in this real estate market, property does not sell very quickly. Homeowners may have to move out of their primary residence and leave it on the market for some time before it is sold. This period where the vacant property is not in use as primary residence, but just sits on the market pending sale, is not counted as a period of non-qualified use. However, if the homeowner vacates the property and converts it to a rental, then the period of rental use does count as a period of non-qualfied use even if it occurs within the 60 month lookback period. Just how I see it.
  4. Dave T


    Steve, When you say "independent contractor", we really need to know more. Is this independent contractor incorporated (whether as a C-Corp or an S-Corp) ? If not an incorporated business, is the contractor's business entity an LLC that is treated as a corporation for tax purposes (whether as a C-Corp or an S-Corp) ? If the answer to either question is yes, then you don't 1099 corporations. The following applies if the contractor worked for your real estate business. If the contractor is a sole proprietor or a partnership (or LLC treated as a partnership), then you do need to issue a 1099 if the contractor was paid at least $600 during the year. This has always been the rule. No new law recently enacted this. The recent health care legislation was seeking to expand the 1099 requirement even more, but those extensions were overturned. If the contractor worked for you personally, doing work not related to your real estate business, then you don't issue a 1099.
  5. A sole proprietor and a disregarded entity are taxed exactly the same. An s-corp is a completely different and distinct business entity. Suggest you get advice from a licensed professional before you incorporate on your own. I suggest you start out as a sole proprietor. See if you like this business and can make money at it before you spend any money to incorporate a business entity.
  6. In normal times, I would say it does not matter since your startup costs will not be that much, probably less than $500. In most states, it does not cost that much to incorporate your business with the State Secretary of State. After you open a bank account and purchase checks, then buy a couple thousand business cards, your start up costs are done. Any office equipment you need to purchase (what don't you already have?) would be a capital expense and not deductible, but rather depreciated over five years. Anything else you do, such as advertising, direct mailing, even mileage to visit potential sellers, are all normal operating expenses and are deductible after you have launched your business. We are not in normal times. With the threat of higher tax bracket rates in 2011, business deductions might be more valuable to you next year. Your call. Since the major portion of your start up costs will be the incorporation expenses, do you need the minimal business start up deduction this year? As an aside, chances are you won't have any reportable income this year anyway. Even if you got a C/A assignment deal done this year, when will the property go to settlement so you can collect your assignment fee? I bet that won't happen until next year anyway because sellers usually don't like to move out of their homes during the holidays. In my opinion, having an s-corp in place this year won't give you any tax benefit over doing business for the rest of this year as a sole proprietor. Additionally, if your income from your day job already maxes out your social security tax withholding, then the s-corp might not provide the tax benefit you are expecting. Consult a CPA to determine the business entity (if any) that works best for your circumstances.
  7. The proof is easy -- maintain a mileage log. The IRS gives instructions on what they want you to record in the log. My personal financial management software even has a Business Mileage Tracker feature exactly for this purpose.
  8. efete, You can receive ordinary self employment income without being a dealer. In the situation you describe, you are taxed as a sole proprietor and your LLC's net income is self-employment income reported on Schedule C (1040) and taxed at your ordinary income tax rate. Furthermore, you will also owe the social security and medicare taxes that will be assessed on that income when you fill out Schedule SE. This is the same tax treatment that a dealer to real estate would have if he were in the same circumstances. Did you believe that dealer income is taxed any differently?
  9. Corey, A little more context would be helpful. We need to know what the homeowner thinks investment income is. Also, it is not clear from your question whether the homeowner is the renter who eventually buys the property he occupies as his primary residence or the landlord for property he currently owns that has been converted to a rental. My response assumes the latter. As far as the IRS is concerned, there are three main categories of income: Active income which is income for which services have been performed. This includes wages, tips, salaries, commissions and income from businesses in which there is material participation. Passive income is the earnings an individual derives from a rental property, limited partnership or any other enterprise in which the taxpayer is not actively involved. Portfolio income is the income from investments, including dividends, interest, royalties and capital gains. As a general rule, the profit from the sale of real estate you own, whether used as your primary residence or held for investment or for business use, gets capital gains tax treatment and would be considered portfolio income. Does not matter how long the property was used as a rental, the sale profit gets capital gains tax treatment. I suspect the homeowner you were talking to was really concerned about the capital gains exclusion on the sale of his primary residence if it has been converted to a rental property prior to the sale. As you know, Section 121 of the tax code allows homeowners who sell their primary residences to exclude their sale profits from capital gains tax treatment if the taxpayer has owned AND occupied the property as his primary residence at least two of the five years prior to sale. The five year window looks backward from the date of sale. As long as the taxpayer has occupied the property as his primary residence at least two of the five years prior to sale, AND has owned the property at least two of the five years prior to sale, he qualifies for the capital gains exclusion. Does not matter how the property was used for the other three years of the five years prior to the sale. The taxpayer can occupy for two years, rent out the property for almost three years before selling the property, and still qualify for the capital gains exclusion. However, once the property is used as a rental for more than three years of the five years prior to the sale, the property is no longer a primary residence and becomes an investment property. The consequence is that the profit is taxed as the sale of an invesment property and can not be excluded from capital gains taxes as the sale of a primary residence. Does this help?
  10. Eric, Even though you referenced taxes in your question, you really don't have a tax question. For most investors, a business entity is tax neutral. That is, you have the same income tax bill regardless of whether the investing is done in your own name or from within a business entity. Business expenses are still deductible even if you are operating as a sole proprietor with no formal business entity in place. The decision on whether to use a business entity and which entity to use is unique to each individual and depends upon your personal net worth, your investment strategy, your liability exposure, your estate planning needs, and other factors your estate planner, your attorney, your tax advisor, and your CPA might suggest. The entity decision is not a one size fits all solution, but needs to be made in consultation with all of your professional advisors' participation. I personally fail to see the value of a business entity for low net worth individuals. Until you have a net worth greater than $2 million, I suggest that investing in your own name and purchasing adequate business liability insurance is sufficient.
  11. Last year, your company incurred more expenses than revenues, resulting in a negative taxable income. You had what is called a net operating loss (NOL). A net operating loss for the company can generally be used to recover past tax payments or reduce future tax payments. The reasoning behind this is that because corporations are required to pay taxes when it earns money, it deserves some form of tax relief when it loses money. If a company has a net operating loss, it can apply this tax relief in two ways or through a combination of both. The company can apply the net operating loss to their past tax payments and receive a tax credit. This won't apply to you this year because you were not in operation in a prior year and did not have any taxable income from business operations. It could also apply the net operating loss to future income tax payments, reducing payments they need to make in future periods. It does not make sense that you should have to pay tax before you get "out of the hole". For example, say you lose $1 million in your first year of business and make $5 million the next year. It wouldn't be fair for you to have to pay tax on a profit of $5 million, because you are really only ahead by $4 million ($5 million profit - the $1 million loss). So, as a general rule, business income is taxable in the year in which it is earned, but net operating losses are either carried forward (7 - 10 years) or carried backward (2 to 3 years). Even though you had a net operating loss for the year, you do not report a negative taxable income on your tax return and do not get to reduce the amount of other ordinary income subject to taxes. I suspect TurboTax Business got it right.
  12. Are you asking whether you have to issue anyone a 1099, or 1098? You can send both the borrower and the IRS a 1098 for the mortgage interest the borrower paid you on his note's amortization schedule. Or, in lieu of issuing a 1098, you can send the borrower a letter telling him the amount of mortgage interest he paid you during the year. Your letter also needs to tell the borrower your name, address and your SSN. If the borrower itemizes his deductions, he claims the home mortgage interest deduction but he has to document on his tax return to whom the interest was paid and provide the IRS your name, address, and SSN. The OID interest you received is just reported on your tax return and taxed the same as your other interest income. You don't issue yourself a 1099-OID.
  13. Todd, The discount you received on the note purchase is called Original Issue Discount (OID). OID is taxed as interest on your tax return as it accrues. Essentially you have to set up two amortization schedules. One for the borrower's payment on his loan amount and another for the borrower's payment on your discounted basis. The difference between interest collected on the two schedules is the amount of OID interest you report on your tax return, in addition to the amortization schedule interest the borrower paid you. For example. Let's say you purchase a note that has a face amount of $100K at 6% fixed over 30 years. Let's say the borrower has already made 40 monthly payments when you bought the note, so the remaining balance on the note is $95603.96. The borrower's monthly payment is $599.55 which will fully amortize the loan at the end of the 320 payment remaining on the note. The next payment that the borrower makes will be the 41st payment on the original amortization schedule for which $121.53 will be principal, and $478.02 will be interest. Let's say that you purchase the note for $75K, and that the borrower is making that 41st payment to you. You create a new amortization schedule for yourself, with $75000 as the loan amount, $599.55 is the monthly payment, and number of payments is 320. On your amortization schedule the monthly payment is stll $599.55 but for the first payment you receive, $50.13 is principal and $549.42 is interest. The difference between the two interest payments of $71.42 represents the OID interest you received that month. If you received only one payment on the loan in 2008, then you would report $478.02 in interest income from the borrower and an additional $71.42 in OID interest income. Does this help
  14. Dave T

    Masked Sale

    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.
  15. Peter, your conclusion is not supported by the details reported at Summit's website. Since the issue seemed to be centered around the exchange funds held in trust, I think it highly unlikely that the liquidity issue stems from a TIC property. They said that their exchange fund trust account is insufficient to meet all of their exchange funding obligations. Tells me that Summit invested the exchange funds in something to generate short term interest -- perfectly legal. A problem arises when the investments fall in value and can not be redeemed for the amount invested. For example, a money market fund's net asset value falls below $1 per share, as has recently happened. Perhaps, a bank failed and FDIC only covered the first $250K on deposit. With millions to deposit, chances are that Summit failed to limit its deposits in any one bank to $250K or less, and one or more of their exchange escrow accounts was at a failed bank. There are more plausible explanations behind Summit's liquidity issue than a problem with a TIC package. Summit says that they are attempting to address their problem through the liquidation of other assets. I would not call a plan to raise capital by selling capital assets a "financial reorganization." We just don't know enough of the details of the problem and the potential solutions to comment any further.
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