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Wavering…

This topic contains 8 replies, has 0 voices, and was last updated by Avatar of newtexan newtexan 8 years, 4 months ago.

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  • #6803
    Avatar of newtexan
    newtexan
    Member

    Hi All;

    I have a few rentals that i own (with underlying loans) that I would like to sell using the trust method but am still wavering as I am unclear about a few things.

    E.g.
    1. Would an assignment of partial beneficial interest (eg 90%) to a potential buyer not be viewed as a (partial) sale by the IRS? I mean what are the tax
    consequenses of such an assignment?

    2. I understand that the buyer will takes the interest deduction and property tax deduction. Can I also take depreciation?

    It is unclear to me as to who the real owner is and who can claim what.

    Thanks for clarifying.

    #33842
    Avatar of scott_l._moyes
    scott_l._moyes
    Participant

    @NewTexan wrote:

    I have a few rentals that i own (with underlying loans) that I would like to sell using the trust method but am still wavering as I am unclear about a few things.

    1. Would an assignment of partial beneficial interest (eg 90%) to a potential buyer not be viewed as a (partial) sale by the IRS?

    No, not as long as you maintain “A” interest in the trust of 10%.

    @NewTexan wrote:

    I mean what are the tax consequences of such an assignment?

    None of the “Assignment”.

    @NewTexan wrote:

    2. I understand that the buyer will takes the interest deduction and property tax deduction. Can I also take depreciation?

    You mean the “Resident Beneficiary”, NOT “the Buyer”, since their is NO SALE, only an Assignment of Interest in a Trust. The IRS entitles the RB to the “active” tax write-off, that doesn’t mean they will take it, but they are entitled to it. The question has always been, can the former homeowner, now Settlor, also take the active tax write-off? Perhaps Bill can explain it better so I’ll defer. But, there is nothing in the code that says you (Settlor) can’t.

    @NewTexan wrote:

    It is unclear to me as to who the real owner is and who can claim what.

    The Real Owner will be The Trustee. That would be Equity Holding Corporation. EHC holds title for the benefit of it’s members or beneficiaries.

    Claim?

    You can claim either a Beneficial or Equitable Interest, “in a trust”. YOU are NOT the Owner of the Real Property. All you own now is a Personal Interest in a Trust. However, it is the beneficiaries that have all (100%) of the control. YOU direct and control the Trustee. The Trustee only holds title at your exclusive control and direction. This is why it is very important who you name as Trustee.

    Each Beneficiary has claim to their interest in the trust and whatever benefits they are entitled to, such as the active tax benefits if they agree to be 100% responsible for the corpus (property) of the trust, including all of it’s payments, maintenance, upkeep and repairs. This amounts to what is a Net Lease with the Right, not the Option or Obligation to Purchase the property on or before the end of the trust term.

    Hope this helps and let us know if you require further assistance.

    #33843
    Avatar of newtexan
    newtexan
    Member

    Thanks Scott.
    That clears up much.
    To reiterate, once I keep > 10% beneficial interest (as Settlor beneficiary), it is NOT considered a sale. Can you point me to some statute on this? – i am arguing with my attorney on this.
    So, as a result of the above, there are no tax consequences as there is no sale.

    I am hoping Bill will comment on the issue of the Settlor taking depreciation while the RB is taking property tax and interest deduction.

    Does the RB take 100% deduction or only as per his percent of beneficial interest?

    #33844
    Avatar of scott_l._moyes
    scott_l._moyes
    Participant

    @NewTexan wrote:

    I am hoping Bill will comment on the issue of the Settlor taking depreciation while the RB is taking property tax and interest deduction.

    Does the RB take 100% deduction or only as per his percent of beneficial interest?

    The Homeowner, now Settlor may choose to take the Passive or Depreciation Tax write-off if they want it.

    The RB can take the entire Active Write-Off, if they make the entire payment. Sometimes the Settlor continues to make part of the total monthly payment and may elect to take their portion of the Active Deduction. It is not based on their percentage of interest in the trust. It is based on their percentage of the qualifying part of the payment.

    #33845
    Avatar of bill
    bill
    Participant

    New Texan (you can use your first name here so we know we’re speaking with a friend..no one will harm you, I promise),

    When you place a property into a trust, you are not selling it.

    When you lease it out to someone, you are not selling it.

    When you are called-upon to name a remainder agent for your trust (i.e., co-beneficiary), you are not selling anything.

    And when that remainder agent is also your lease tenant (leasing from your trust), you are not selling anything…it’s just that because of the arrangement, and because of IRC 163(h)4)D) that a co-beneficiary who can show that he/she pays the interest and property tax, and has the burden of ownership and possession, can claim the active tax loss (if they want to) according to Sec. 163 et. seq….

    What the the tenant beneficiary does between him/herself and the IRS is none of your business; therefore, there’s nothing to stop you from taking any write you would ordinarily be entitled to…however, it would do you no good to claim the write-off, because if you do, you’re going to have to claim the rental income [that you never receive]. The trustee’s collection service gets the rent it and sends you the overage as your Pos. CF…and you still have to pay tax on your positive cash flow. Ergo, why take the deduction? When you don’t, you don’t need to claim the rent as income (so, no tax on that non-existent income); and whether you claim it nor not, you’re still paying tax only on your positive cash-flow.

    It’s da Sam Ting eater weigh.*

    Bill

    * Some Chinese guy I know.

    #33846
    Avatar of newtexan
    newtexan
    Member

    @bill wrote:

    New Texan (you can use your first name here so we know we’re speaking with a friend..no one will harm you, I promise),

    When you place a property into a trust, you are not selling it.

    When you lease it out to someone, you are not selling it.

    When you are called-upon to name a remainder agent for your trust (i.e., co-beneficiary), you are not selling anything.

    And when that remainder agent is also your lease tenant (leasing from your trust), you are not selling anything…it’s just that because of the arrangement, and because of IRC 163(h)4)D) that a co-beneficiary who can show that he/she pays the interest and property tax, and has the burden of ownership and possession, can claim the active tax loss (if they want to) according to Sec. 163 et. seq….

    What the the tenant beneficiary does between him/herself and the IRS is none of your business; therefore, there’s nothing to stop you from taking any write you would ordinarily be entitled to…however, it would do you no good to claim the write-off, because if you do, you’re going to have to claim the rental income [that you never receive]. The trustee’s collection service gets the rent it and sends you the overage as your Pos. CF…and you still have to pay tax on your positive cash flow. Ergo, why take the deduction? When you don’t, you don’t need to claim the rent as income (so, no tax on that non-existent income); and whether you claim it nor not, you’re still paying tax only on your positive cash-flow.

    It’s da Sam Ting eater weigh.*

    Bill

    * Some Chinese guy I know.

    Thanks Bill;
    You cleared up a lot of things (but added a few :? )
    As I described in my situation above – I own these properties.

    Can you please expound on the following…

    “however, it would do you no good to claim the write-off, because if you do, you’re going to have to claim the rental income [that you never receive]. The trustee’s collection service gets the rent it and sends you the overage as your Pos. CF…and you still have to pay tax on your positive cash flow. Ergo, why take the deduction? When you don’t, you don’t need to claim the rent as income (so, no tax on that non-existent income); and whether you claim it nor not, you’re still paying tax only on your positive cash-flow.”

    I am not understanding how I should not claim rental income. I am confused by the phrase “[rental income] that you never receive” – I do receive rental income from the RB payments, don’t I?
    What am I missing? Consider me a 5yr old today :) Thanks
    Sid (newTexan)

    #33847
    Avatar of kevinscott
    Kevin Scott
    Member

    NewTexan, kindly download Bill’s FREE Book in PDF format, No Down, No New Loan! Great overview, with plenty of specific details and citations for you and your attorney to consume. Here’s the link:

    http://landtrust.net/NoDownNoNewLoanPDF.html

    #33848
    Avatar of newtexan
    newtexan
    Member

    Thanks Kevin – I have that book as well as A Fortune in free RE. However, unless I gloss over it I did not come across the above question.
    Sid

    #33849
    Avatar of buzzbox_2
    buzzbox_2
    Member

    If you operate the property yourself as a conventional rental, you ordinarily would report income and direct expenses and report the net income (or loss) sheltered by depreciation.

    If the property is placed in a NARS trust a similar situation exists, the only difference is that the Trustee is handling the money and providing you with any positive cash flow, to which you can apply depreciation, achieving the same result.

    Now consider the RB in a NARS trust, as compared to the conventional tenant. The RB can deduct the usual items that a typical homeowner enjoys, interest paid on the mortgage loan and RE taxes, whereas a conventional tenant could not.

    The point that others have made, is that each of the beneficial interests can act alone for federal tax purposes. If the SB or IB elect to take a deduction for depreciation then they must also report income and expense derived from the property. At the same time and independently of the other beneficiaries the RB can take the usual deductions allowed homeowners, basically RE taxes and mortgage loan interest.

    That???s the way I understand it ??? but I???m no bean counter!

    #33850
    Avatar of bill
    bill
    Participant

    @NewTexan wrote:

    - I own these properties.

    Can you please expound on the following…

    I am not understanding how I should not claim rental income. I am confused by the phrase “[rental income] that you never receive” – I do receive rental income from the RB payments, don’t I?
    What am I missing? Thanks
    Sid (newTexan)

    Thanks Sid,

    As ably stated by “the bunch” when you don’t recieve the income, you don’t claim it…you only claim what makes your wallet fatter (the pos CF). Also when you say “I own these properties” the fact is that you don’t when they are in a land trust…the trustee owns them for you: you are not on title any longer.

    Bill

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