The IRS and Lease Options

General Real Estate Investing
1

I have been criticized for pointing out pitfalls when using a lease option as a seller – specifically, that lease options violate the DOSC, and that in most cases, your tenant can claim an “equitable interest”. I point these things out because it’s important that you know exactly what you are doing. Do you know what your are doing? What about the tax consequences of lease options?

How about the IRS and Lease Options? Do you know anything about how the IRS treats your investment? Here is an article: Lease Option or Installment Sale? Determine the “Economic Realty” of Your Lease-Option Transactions–or the IRS Will. By Donald J. Valachi, CCIM, a well-respected real estate authority. Here is his summary:

“Although the lease option is a valuable strategy in many situations, it should be used with great care. There is always a threat that the IRS may view the lease-option transaction as a sale and the lease as merely a financing device. Rents that are significantly above fair market rents, when combined with a “bargain” option price, indicate that the transaction is likely to be characterized as a sale and that the rental payments are, in fact, installment payments on the purchase price. Thus, both the rental payments and the option price should be set by the parties with reference to going market values and rents for similar properties. And the parties should be prepared to justify their estimates of rent and purchase price if the transaction is later challenged by the IRS. Rental value and property value are best established through independent appraisal by experts.” Here is the link to the full article:

http://www.ciremagazine.com/article.php?article_id=691

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This information has been gathered from various IRS pronouncements. The IRS may characterize a lease-option transaction as a sale if one of the following factors is present:

* The lessee acquires equity through lease payments.
* The lessee acquires title to the property after the required number of lease payments has been made.
* The lessee's total lease payments are due in a relatively short time, and the payments substantially cover the amount required to purchase the asset.
* The lease payments substantially exceed the fair rental value of the property, indicating that the transaction is financed over less than the life of the asset.
* The property will be acquired by the lessee at the end of the lease term for a nominal sum.
* The lessee participates with the lessor in the acquisition of the asset by guaranteeing a loan or through similar agreements.
* The lessor has little or no at-risk investment in the property (the IRS looks for a minimum at-risk investment of 20 percent of the asset's cost). THIS MEANS NO SANDWICH LEASE OPTIONS.

I hope this information is informative and helpful. Experts say lease options should only be used with great care. Funny, I’ve heard that before.

Da Wiz

2

You get criticized for board hustling, degrading any method of investing that does not use a trust, thread hijacking and general annoyance. You don’t get criticized for answering questions or passing on information when it is done properly.

This post is another example of you trying to make any non trust method look bad, despite investors doing it for years. I haven’t seen anything you mention stopping investors from doing it without a trust, so it is another attempt to degrade any method of investing that does not use a trust.

You DO NOT NEED A TRUST to do a lease option, PERIOD. This is just another scare tactic to try to get people to use your precious NARS trust. You can try to fool people all you want, but you won’t fool anyone who can read through the BS you post. If the IRS stuff was a major deal, nobody would do a traditional lease option. So save your misleading posts, and save the board hustling.

Enough is enough already. This nonsense is getting old. This is getting tiring and it needs to be stopped. This man promotes a trust that one specific person has a trademark on. It’s not like investors can use his trust method anywhere else. That is nothing but pure board hustling. I, and many others are just sick of this BS over and over, in every other post.

And I am not fooled by the stuff you posted. I know there is nothing specifically mentioning a trust. But I also know your act…to wait for someone to ask how to do it, then you do your trust song and dance. I am going to make sure you dont fool any new investors with your board hustling.

3

The topic is lease options and their tax consequences. The article is about IRS guidelines to follow to be in compliance. That seems pretty important and I’m sure the visitors to this thread are capable of making up their own minds without your prior censorship. It has nothing to do with trusts. What are you trying to hide? Did you read the article?

Do I listen to a man named Bobo or to the man who wrote the article, Dr. Donald J. Valachi, a Clinical Professor of Real Estate and Co-Director of the Real Estate & Land Use Institute at CSUF. Prior to joining the CSUF faculty in 1995, he served as a member of the Real Estate Faculty at USC for 15 years. Dr. Valachi has published over 90 articles on real estate issues in various professional journals, industry periodicals, and newspapers. He has been actively involved in the real estate business in his own firm as both an investor and investment broker. In addition, he has conducted real estate training seminars for both real estate investment brokerage firms and one of the “Big 4” CPA firms. Dr. Valachi is a CPA and received his M.B.A. degree in Accounting from California State University, Long Beach. In addition, he received his doctorate in business administration, with an emphasis in Real Estate and Urban Planning, from the University of Southern California.

Even John T. Reed, whom I do not like but who many believe says: “The gurus are not interested in finding out what the law really is on lease-options. I have long urged them to obtain an IRS private letter ruling on the income-tax legality of their lease-option agreements. The cost of such letter rulings was drastically lowered years ago. But not a single lease-option guru has ever requested such a ruling, in spite of the fact that it would help his clients and help him market his material.”

The purpose of this thread is to educate on real estate issues, not get into a meaningless debate designed to distract others. Peace.

Da Wiz

4

It is NOT illegal. It says the IRS MAY characterize it as a sale, it does NOT say it will, and it does not say it is illegal.

This is just another example of scare tactics.

5

No wonder you are scared. The IRS MAY characterize it as a sale and tax you, the Banks MAY invoke the DOSC, the courts MAY rule your tenant has an equitable interest. Your “what, me worry?” attitude is contradicted by your ranting. Let’s face it, there are a lot of loopholes you don’t want addressed. And remember, this is about lease options.

Da Wiz

6

Your fear tactics don’t scare me. The “may” amounts to a small percentage, and is not enough to make me overspend on the trust that you keep shoving down everyones throats. Investors have been doing fine doing traditional lease options and sub 2’s for years. Your fear tactics over things that do not happen often just continue to show what you are about. You just want to do whatever you can to make it seem like any investment method without a trust is dangerous, and it is complete nonsense.

If the things you mentioned, such as DOSC, equitable interest, and now the IRS thing…if these actually were a real issue, investors would not be using traditional methods to invest. But these things don’t happen enough to concern most investors, no matter how much you try to say they do.

Using fear tactics to try to scare people into using a trust are unprofessional and unethical as far as I’m concerned.

By the way, the word “MAY”, when it comes to the DOSC, equitable interest, and now the IRS, amounts to a tiny percentage, and certainly not a big enough issue to overspend on the trust. A trust is definitely not needed to invest, and especially the overpriced NARS trust. Paying 1% of the value of the property is insane to protect you from things that rarely happen.

7

Of course, Bobo, you are the expert. You bought John Cash Locke’s course last year and that gave you instant credibility. Forget what know-nothing experts like Dr. Valachi says about taxes and lease options. Forget what Bill Gatten says about banks and the DOSC. Forget what Scott Moyes, John T. Reed, and dozens of others warn about equitable interest. Burying your head in the sand makes a lot of sense. Again, this thread is NOT about trusts, but since you mentioned them, I never pay a penny for them – my tenant does. Finally, saying that equitable interest is uncommon is flat-out wrong. It happens FREQUENTLY.

Da Wiz

8

There is risk involved in any activity and it does not matter if we are talking about Real Estate investing or not. The key is to simply select activities that will minimize that risk. Personally I have seen the DOSC kicked in on a Lease Option situation. I don’t do lease options just for that reason. As we all know they are cracking down on Lease Options across America and there is a reason for this. What is that reason? The United States Government does not like the fact that you are giving someone a specific time frame to purchase the home and or lose your deposit on that property and personally I do not blame them for that. Is there a creative yet simple way around that? Yes and someday when it is not 1 am I will share that with you if you would like.

Here is the bottom line on this situation If you are doing Lease Options chances are you are also doing Subject 2 I have also seen the DOSC kicked in there as well. So it gets back to the key point here which was select activities that will minimize that risk.

There are old investors and there are BOLD Investors… I have never met an OLD BOLD Investor.

9

Speaking of the IRS and taxes this July 4th weekend, Congress first attempted to impose an income tax in 1894. The Supreme Court struck the tax down as unconstitutional. In 1913, Congress amended the Constitution in order to impose an income tax without being overridden by the Supreme Court. The Supreme Court responded to the 16th Amendment by:

A. Respecting Congress’ power to alter the Constitution as it sees fit and declaring the Income Tax Act legal.

B. Refusing to hear any cases brought before it challenging the Constitutionality of the income tax and therefore allowing the law to stand.

C. Ruling that the 16th Amendment conferred no new power of taxation in the cases Stratton Independence v. Hobart, Southern Pacific v. Lowe, Bowers v. Kirbo Empire and five others, meaning – the income tax is unconstitutional.

THE ANSWER IS “C”

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Recently in England a national ID card was issued to all citizens of the UK. One of Adolf Hitler’s first acts as Chancellor was to establish national ID papers for the German people in order to assert domination over them. Now, some want a national ID card for the American people – complete with checkstops. When do you think Americans would allow this?

A. Never

B. After another major terrorist act, for the sake of security.

C. When the technology becomes available to implement it.

D. May, 2008. Legislation has already been passed.

THE ANSWER IS “D”

Watch this 30-second Trailer:

http://www.youtube.com/watch?v=N331kGvh0U0

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These are the very freedoms our soldiers have fought and died for. We are becoming less free every day. Janis Joplin said it best: “Freedom’s just another word for nothing left to lose”. Wake up America before it’s too late. Peace and Happy 4th of July.

Da Wiz

10

<<Janis Joplin said it best: “Freedom’s just another word for nothing left to lose”. >>

Janis Joplin just regurgitated those words in one of her drug-induced babblings that apparently sufficed to some as music…Kris Kristofferson said it.

<<One of Adolf Hitler’s first acts as Chancellor was to establish national ID papers for the German people in order to assert domination over them.>>

Yeah and another was to take all of their firearms…kinda like the left would do today if left unchecked…???

Apparently we’ve moved from “DOSC - the sky is falling, the sky is falling” to “National ID Cards - the sky is falling, the sky is falling…in a year we’ll all be Nazis”…??

11

This will solve all the back and forth over who is hustling who.

If you are an investor and have an investor loan on your propery. You don’t have to worry about DOCS.

If you are a homeowner, with loans intended for homeowners only. If you do anything with the property other than sale it for cash. Put it into a land trust.

Now hope this will help you keep the peace.