Investor Wrap loan from Investor Loan Source for Texas property

[MIke Hewitt]

We recently purchased our first investment property with Sherman Bridge. Paid 165K and did 35K of rehab (inc. new AC and roof). ARV is 265K. Rental income would be approx 1850 per month. We are under the impression if we sell outright we would owe IRS approx 20K in short term capital gains. We've owned the property only 3 months. Investor Loan source has a legal program where they allow the investor to owner finance (wrap) a property. The numbers appear to indicate that this would be an excellent cash flow exit strategy. Has anyone used this program or done anything like this? We appreciate all input.

[Jon Holdman]

@MIke Hewitt what was your intention in purchasing the property?  If it was to fix up and sell then the profits are ordinary income.  Investment income does not come into play.  That would apply if your intention was to hold the property as an investment, e.g., a rental.  If you bought it intending to hold and rent it but then received a offer to buy it you could not refuse then the profit would be capital gains.  Long term if held over a year, short term if held a year or less.  But for fix and flips, the profit is all ordinary income.

Also, I believe there are special rules for an installment sale in this situation.  Normally and installment sale would allow the profits to be spread out as the installments are made.  But I seem to recall that in a case like there, where you're selling inventory rather than an investment, that the profits must be recognized when you sell, even with an installment sale.

You really want to consult with your accountant.

And realize that there is nothing illegal about selling a house with a wrap, regardless of the loan terms.  It is a contractual issue (civil issue) if you violate the due on sale clause in your underlying loan.  Its not illegal, you won't get arrested.  The lender may foreclose, but you won't go to jail.   All this lender is offering is a loan that doesn't include the due on sale clause, allowing you to wrap it without violating the loan terms.