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Dealer Status

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  • #26188
    Avatar of jerry carey
    jerry carey
    Member

    Dancer53 said:

    I would have to research each state’ law to determine if each state recognizes the Doctrine, correct?

    Yes … only if you don’t believe us :!: This doctrine is ACCEPTED in all states except Tennessee and Louisiana! This Doctrine plays a much more important role in land trusts than self-employment taxation. It is the basis upon which a Co-Beneficiary Land Trust’s property cannot be liened nor partitioned by creditors of the individual Beneficiaries :!: This is one of the most important benefits offered by a Land Trust!

    Dancer53 said:

    As to paying Ordinary Straight Income Tax under the Dealer Status, it is not ordinary tax that I am concerned about, it is the self employment tax that I think I would get hit with i.e. both sides of SS tax, Medicare, State Disability etc., etc. Wouldn’t all of those taxes come into play if I get tagged a Dealer? Or do I avoid that completely since as per a previous answer, I only hold a beneficial interest in the Trust and therefore it is the Trustee who sells the property not me. Do I have that right?

    Placing the property into a Land trust is not very different than placing ownership with a Corporation or a Limited Liability Company (LLC). The property of these types of entities ar not subject to the creditors of individual Corp. stock-holders or individual principals in a LLC! If you sell Coporate stocks … you pay income taxes (Capital Gains or Stright Income) … but not self-employment taxes of which you described!

    Jerry Carey

    #26189
    Avatar of anonymous
    anonymous
    Member

    Thank You Jerry. You obviously are very knowledgeable about Land Trusts. Your answers are very clear and comprehensive. And what’s best is, I understand them.

    There is just one last thing that I am not clear on and I mentioned it in my last question. Here it is: as far as the Federal Gov’t (IRS) is concerned, what prevents me from being deemed a Dealer? Is it the fact that the Trustee owns the property and is the one selling the property and I as owning a beneficial interest in the Trust am not the seller and therefore can’t be a Dealer????

    Many thanks.

    Deborah aka Dancer53

    #26190
    Avatar of areyes
    areyes
    Member

    personal estate versus real estate
    personalty versus realty
    personal property versus real property

    that’s the difference between someone being called a dealer.

    dealers are those that are flipping real estate short term.

    EHT is mainly long term triple net leases.

    #26191
    Avatar of anonymous
    anonymous
    Member

    Oh, so then, the Trust won’t avoid the Dealer Status for my properties that I want to flip short term? You see I have a dual purpose for wanting to use a Land Trust. One is for long term rental property I already own and have negative cashflow on. But the other purpose is for buying short term flippers on which I am trying to avoid the Dealer Status with the IRS. Are you saying that the Trust won’t achieve that end for me?

    Deborah

    #26192
    Avatar of mtnwizard49
    mtnwizard49
    Member

    Real estate dealer

    If you are considered a real estate dealer, you have a trade or business, not an investment. This means that you will have to pay self-employment tax of 15.3%, just like any other business. But what is potentially worse, you will also have lost the ability to take the installment method for tax.

    This means that if you sell a property “over time” using any form of seller financing, you cannot pay tax on the gain as you receive payment. Instead, you have to pay ALL of the tax on the gain on the property immediately, even though you might not have received any money yet.

    How does the IRS determine dealer status?

    The IRS determines real estate dealer status based on the “intent” of the taxpayer holding or buying the property. The characterization of gain or loss on the sale or exchange of real property turns on whether the property was held “primarily” for sale or investment. The Courts have come up with their top fifteen items that they look for in determining the status:

    *

    Taxpayer’s purpose for acquiring, holding and selling the property

    *

    Number, frequency and continuity of sales

    *

    Duration of ownership

    *

    Time and effort expended by the taxpayer in promoting sales

    *

    Taxpayer’s use of brokers

    *

    Extent of improvements and subdivision made to facilitate sales

    *

    Ordinary business of the taxpayer

    *

    Extent and value of the taxpayer’s real estate holdings

    *

    Extent and nature of the transactions involved

    *

    Amount of income from sales as compared with the taxpayer’s other sources of income

    *

    Taxpayer’s desire to liquidate landholdings unexpectedly obtained

    *

    Taxpayer’s overall reluctance to sell the property

    *

    Amount of advertising

    *

    Use of a business office for sales

    *

    Taxpayer’s control over any sales representatives

    Of these, the most important issue appears to be the number, frequency, and continuity of sales. In other words: If you sell a lot of property, you might be considered a dealer simply because that appears to be the type of real estate “investing” you do. It is also possible to be treated as a dealer on one property and an investor on another.

    In this case, the IRS will look at the taxpayer’s intent with that particular property. For example, they will look for sales activities that show that property was held primarily for sale if they are attempting to prove dealer status. These activities would include advertising, “for sale” signs, a sales office, etc.

    #26193
    Avatar of anonymous
    anonymous
    Member

    Thank You Gary. Those were the details I was looking for. The only question left is:

    if I hold my short term flipper properties in a Land Trust, will I be able to avoid the Dealer Status because of the fact that the Trustee owns the property not me, or for any other reason??????

    Deborah

    #26194
    Avatar of scott_l._moyes
    scott_l._moyes
    Participant

    @Dancer53 wrote:

    if I hold my short term flipper properties in a Land Trust, will I be able to avoid the Dealer Status because of the fact that the Trustee owns the property not me, or for any other reason?

    If you do it correctly you will NEVER have to take title yourself or expose yourself to any risk or liability whatsoever, including being classified as a dealer.

    Remember, our offers are only to Acquire an Interest in a Trust, not a property. Get an NEO signed with an Appendix #1 Purchase Offer to Acquire an Interest in the Owner’s Trust. Now you have an interest in the transaction and can market for another party to Acquire an Interest the Owner’s Trust also. Unless you are a Licensed Realtor, you CANNOT look for a Property “Buyer”.

    Always make sure you have your contracts in place BEFORE you go looking for an RB or a “Buyer” in particular. If you do not have that in place and don’t have a Real Estate License, you could get yourself in trouble.

    #26195
    Avatar of jerry carey
    jerry carey
    Member

    Deborah asked:

    if I hold my short term flipper properties in a Land Trust, will I be able to avoid the Dealer Status because of the fact that the Trustee owns the property not me, or for any other reason??????

    When I first read your question above … I thought to myself … Doesn’t she listen(read the responses)! Then after a little more thought … I realized that what you asked was a very good question!

    If you buy property with the intent to “flip” it (short term) and either take title in you name or as the Trust creator … Settlor Beneficiary I don’t think that there is any difference to the IRS with regard to “Dealer Status” determination! However, this should only apply to the properties you already own! Stop buying properties that way Immediately! I mean ain your personal name or as Settlor Beneficiary.

    The way to avoid any inkling of a “Dealer Staus” with the IRS is NOT to buy the property (Realty), but leave the seller as Settlor Beneficiary and you come in with the NAR’s “magic” and become the Investor Beneficiary(IB). As so clearly stated by Gary … you have investment interest not ownership of of Realty … and therefore there is no way for the IRS to consider you a “Dealer”!

    We on this forum have discussed ad nauseum how to do “flips” using the NARS’ transactions to avoid “seasoning problems withend-buyer lenders, how to use Hard-Money-Lenders’s money to flip in Short Sales transactions and even how to allow the end-buyer to wind-up with equity in the property after closing! Do a search for “Flips”, “Double-Closings”,
    “Simultaneos Closings”, etc. … and you’ll find numerous postings and detailed responses on how to do these types of transactions.

    Jerry Carey

    PS: I just saw thtat Scott Moyes responded while I was typing this … but I don’t see any conflict in what is being said.

    #26196
    Avatar of anonymous
    anonymous
    Member

    Thanks to Jerry and Scott. I will do a search for flips and double closings. Just so you understand what I am really doing let me tell you that I am not buying property from a Settlor Beneficiary or any benefiary of a Trust. I am buying REO’s from the bank or Hud. I am buying through a broker and I will be selling through a broker.

    What I was hoping I could do was to buy in my own name and then put the property in a Land Trust while it was being rehabbed. Then have the Trustee sell the property, not me, and then I guess the Trustee pays me through escrow. Therefore I am only the beneficiary of the Trust and can avoid the Dealer Status because “I’m not selling anything”, the Trustee is selling.

    I’ll wait for your response before I do the search on flips and double closings.

    Deborah

    #26197
    Avatar of areyes
    areyes
    Member

    @Dancer53 wrote:

    Thanks to Jerry and Scott. I will do a search for flips and double closings. Just so you understand what I am really doing let me tell you that I am not buying property from a Settlor Beneficiary or any benefiary of a Trust. I am buying REO’s from the bank or Hud. I am buying through a broker and I will be selling through a broker.

    What I was hoping I could do was to buy in my own name and then put the property in a Land Trust while it was being rehabbed. Then have the Trustee sell the property, not me, and then I guess the Trustee pays me through escrow. Therefore I am only the beneficiary of the Trust and can avoid the Dealer Status because “I’m not selling anything”, the Trustee is selling.

    I’ll wait for your response before I do the search on flips and double closings.

    Deborah

    after reading this, my initial thoughts are you are purchasing real estate and then transferring title to the trustee. in my opinion, i would think you’re a dealer after doing it multiple times. if its just one or two, i wouldn’t think of you as a dealer.

    #26198
    Avatar of jerry carey
    jerry carey
    Member

    Deborah said:

    What I was hoping I could do was to buy in my own name and then put the property in a Land Trust while it was being rehabbed. Then have the Trustee sell the property, not me, and then I guess the Trustee pays me through escrow. Therefore I am only the beneficiary of the Trust and can avoid the Dealer Status because “I’m not selling anything”, the Trustee is selling.

    I said in my previous post:

    If you buy property with the intent to “flip” it (short term) and either take title in you name or as the Trust creator … Settlor Beneficiary I don’t think that there is any difference to the IRS with regard to “Dealer Status” determination!

    Deborah said:

    Just so you understand what I am really doing let me tell you that I am not buying property from a Settlor Beneficiary or any benefiary of a Trust. I am buying REO’s from the bank or Hud. I am buying through a broker and I will be selling through a broker.

    You can do NEHTrust tranactions with any selling entity you wish … REO from banks, Short Sales, HUD properties, FSBO’s or MLS listed property! the crux of the matter is that you NEVER take title to the property in your own name!

    With properties with loans in place … FSBO’s, MLS “Listed” property or Short Sales … you negotiate a purchase price with the seller, the trust is set-up … Seller is Settlor Beneficiary (SB) and you as Investor Beneficiary (IB) and the agreed sale price as the MAV in the trust doc’s. . You as IB then find and negotiate a sale price with end-buyer (with their own financing in place) and the sale is closed from the Trust/(Trustee) to the end-buyer. You get the difference between the two prices (MAV and higher sale price) as a trust contribution disbursement as a selling trust beneficiary (IB)! The end-buyer’s lender does not have a seasoning problem since there is only one sale closing! Transfer from the owner to their trust is NOT considered a sale!

    REO property and HUD owned property are a different story … there is no existing loan to be paid-off. Take title to the property as a Trust … with your S-Corporation or LLC entity as Settlor beneficiary and make the end-buyer a co-beneficiary of the PACTtrust to help avoid seasoning issues with the end buyer’s lender.

    Do your searches of past posts, as previously recommended.

    Jerry Carey

    #26199
    Avatar of anonymous
    anonymous
    Member

    Why do I have to have an LLC or Corp. as the Settlor Beneficiary? Can’t the bank that I’m buying from or HUD be the Settlor Beneficiary?

    #26200
    Avatar of dbhenderson
    dbhenderson
    Member

    @Scott_L._Moyes wrote:

    @Dancer53 wrote:
    Always make sure you have your contracts in place BEFORE you go looking for an RB or a “Buyer” in particular. If you do not have that in place and don’t have a Real Estate License, you could get yourself in trouble.

    Okay Scott, this brings up a question I’ve been wrestling with. Why do we need to have anything signed until we find the RB? I don’t need to be RE licensed to try and find a leasee. I have been just asking the seller if he wants me to put out the yard signs, directional’s, and post it on my web site to see if I can find a Lease2Own. Then when I find an interested RB my terms are to get all the paperwork to do the NEHTrust.

    I feel that after losing, I don’t how many, to the NEO that, who needs it. If they will let me market with the yard sign, and MY web site why do I need a signed NEO? If I find the RB with 5% plus first month why not just go right to the trust docs? If I find an RB that’s willing to take over their payments, maintain the yard and the property and then when I can get them qualified to buy, buy at a full price, I would think the seller would just about be willing to sign anything? At least I won’t get shot down before I even get a chance to get off the runway into the air like what is happening trying to get a NEO signed.

    Your comments please.

    DavidB

    #26201
    Avatar of anonymous
    anonymous
    Member

    I think we got our wires crossed on that last question I asked. I was asking why i would have to have a corp. or LLC as the Settlor beneficiary if I am buying from HUD or a bank REO? Can’t the bank be the Settlor Beneficiary?

    Deborah

    #26202
    Avatar of mtnwizard49
    mtnwizard49
    Member

    NO. They won’t do it.

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