All Forum Posts by: Account Closed

This is simply a tax question, so look at it from the perspective of the IRS.  You bought the property in your name.  You sold the property in your name.  You reported the capital gains on your tax return and you paid the taxes.  The IRS is happy.  That's the end of it.  Your Uncle has nothing to do with it.  What money passed back and forth between the two of you is not a taxable transaction.  The IRS does not care where you got the money to buy the property and they don't care what you did with the money after you sold it.  Don't worry about it.

Are you a U.S. citizen?  Is your brother a U.S. citizen?  Do you have resident status?  Does he?  We need to know these things before discussing which business entity suits you and your situation.

Here's the kicker.  The Relinquished Property and the Replacement Property CANNOT  both be in the name of the Exchangor at the same time.  No exceptions.

This is not complicated.  It's called Wraparound Financing and it has been going on since the early 80's.  I've done hundreds of these for clients.  If he bought the property for $1,150,000  and he sold it for $1,300,000 he has a gross profit of $150,000.  He deducts his transaction costs of $30,000 and he has a net profit of $120,000.  This is his capital gains.  If he held the property for a year or less, this $120,000 will be Short Term Capital Gains and taxed at his ordinary income marginal tax rate.  If he held the property for more than a year, the $120,000 will be taxed at whatever his Long Term Capital Gains Tax Rate is, determined by his Adjusted Gross Income.  He sold the property on an Installment Sale, so the Installment Sale Rules apply, and those Rules say that the capital gains is taxable as he receives it with each payment.  But for the first year of the installment sale, the down payment is included with the first series of monthly payments.  And since he received $200,000 down payment, the entire $120,000 is taxable as capital gains at the end of the tax year in which the sale took place.  The payments he receives will be interest and will be taxed as Interest Income, reported on Schedule B as "Seller Financed Mortgage" and included in his other income on Form 1040.  The only way to avoid paying the capital gains tax under this scenario is to not report the Down Payment on Form 6252 Installment Sale Income, and that would be Tax Evasion.  Not a good idea.

By the way, he says he would only report the $1,833 monthly difference between what he is receiving from his Buyer and what he is paying to his Seller.  This is incorrect.  He would be required to report the entire $6,875.00 monthly payment as interest income on Schedule B.  The $5,041.67 monthly payment that he is paying on his note must be claimed on his Schedule A Itemized Deductions as "investment interest expense."  But this deduction is only available while he is holding the investment property for income or for appreciation, and ceased when he sold it.  So, it looks like he stepped in that one, too.

Conclusion:  he will pay capital gains tax on the $120,000 in the year of sale; he will report $82,500 of annual interest income; and he will get no benefit from the $60,572.04 portion that he sends to the original owner.

You're welcome.  Stick with it, I've done deals like this, and what with dealing with the IRS and the family, it's like herding cats, the end result is worth it.  And I really don't see a downside.

Michael Lantrip

Now we have determined why the IRS is not responsive.  Under Texas law, at the moment of the taxpayer's death, ownership of this property vested in "The Estate of _____."  The children are not the owners.  They might someday be the owners, they might not.  But look at it from the point of view of the IRS.  Someone contacts them saying they are the son of a taxpayer, the taxpayer is deceased, and they want to talk about releasing a tax lien.  Even if this is true, and it often is, the IRS is prohibited by law from responding to that.  That is why they have been unresponsive.

In order to get the ball rolling here, assuming there is a Will leaving everything to the son who is trying to sell the property, the son must hire an Attorney to file the estate for probate, and obtain Letters Testamentary naming the son (if he is so named in the Will) as the representative of the estate.  The Attorney will then contact the IRS as the legal representative of the son, enclose copies of all documents, and request an exact payoff of the tax lien, and ask if the IRS is willing to accept the net sales proceeds of the sale of the property and release the property from the lien.  I guarantee you that the IRS will respond.  The attorney should then take the response to the Closer for the Title Company, and you are on your way.

This is the way it works.

I hope this helps.  Let me know if you have any follow-up questions.

Michael Lantrip

You called him the "Seller" but who is he exactly, in relation to the deceased person who owned the property?

Jason McDougall:

What you need to do, although it is very difficult, is stay out of the problem.  I ran a Title Company for 20 years in Texas, and I can tell you this: the IRS will deal with two people, and only two people, the legal representative of the father's estate (not the heirs, the legal representative), and the Closer for the Title Company.  No one else will be getting a reply from the IRS.  So, your best bet is to sit down and talk to the Closer at the Title Company and ask if there is anything you can do to help them.  You can also talk to the representative of the estate and ask them if there is anything you can do to help.  I have been through this a number of times, and I also worked for the IRS, and I have never seen anyone other than the taxpayer, the taxpayer's representative, or a licensed escrow or fiduciary agency handling a transfer, get a tax lien released.

But it looks like you could make the situation work for you.  Ask the Title Company who has the authority to transfer title to the property.  Then get that person to accept $ for an option to purchase at your 120K price.  That puts you first in line if this is ever cleared up.  Alternatively, talk to that person about a Lease/Purchase situation.  You could end up controlling the properties for years.  In my experience, the IRS is not going to do anything with the tax lien except keep renewing it every ten years.

It looks like a good deal. Work it!

Jason, I suggest that you contact Brandon Hall, ask him for a referral, or even if you can become one of his clients.  He knows his stuff.

Michael Lantrip

Jason Faucher:

Congratulations.  It sounds like you did very well.

The bad news is that now, in addition to being the other professionals that you are, you are also a Real Estate Developer. What you did is your new business. The 40K is business income. There is no way that it can be capital gains. It will be taxed as ordinary income, at your marginal tax rate. It also sounds as though you did not do an LLC and choose to be treated as a Sub S corp, so the income will also come to you as Earned Income, and will also be subject to Self Employment Tax (although you might have already paid the maximum).

I applaud your decision to set up some kind of system before you do anything like this again.  There are some great ways to organize this that will minimize your taxes.

Again, good job on the 40K profit.

Michael Lantrip