Tax Traps and Solutions
Since it is getting that time where everybody is starting
the hustle to have their financial affairs wrapped up in
order to see how much Uncle Sam is going to
demand from us, I thought I might give a few tips and
hints as it relates to notes.
To buy a note or sell a note, contact me at www.hpnotes.com
To begin, in 2007, if you owner financed a note as part
of your business or trade, you need to get your 1098s
in before January 31st. Remember to fill out your
1096 also. Ask your CPA to be sure.
Here are some "biggies" to be on the alert for if you
owner financed a note(s)
1. If you are NOT considered a real estate investor
and took back a note to sell your property, the IRS
considers this the same as receiving cash. OUCH!!
For example, you made a $20,000 profit, but this
amount was realized in the form of a note, you owe
money as if it were cash. In this example, say you
were in the 30% tax bracket, you would owe $6,000
cash, although you have only an owner financed note.
2. If your property is considered investment property,
and you sold using owner financing, although you can
take advantage of an installment sale, you run the risk
of having depreciation "recaptured". This means the
IRS is going to consider the depreciation you took on
property as income, and then tax you for it. DOUBLE
Assuming these examples are first lien notes, both of
them have solutions. Sell part of your note to pay for
the taxes, and keep the remainder of the note for the
future. There are several methods that can be tailor
made to meet your goals.
A case in point is a rehabber who sold several
properties using owner financing. He accumulated a
$28,000 tax liability, but had no cash, only several
notes, most of which were second lien notes.
However, he did have a $100,000 first lien note that he
could sell, although he did not want to sell the entire
note. We are now in negotiations for me to purchase
between four and five years of payments for $28,000.
A second possibility would be for me to buy part of the
monthly payments for 10 years. This would give him
continued smaller monthly cash flow, while at the
same time providing him with the $28,000 to pay off
Either way, his tax bill on all his notes is going to be
solved by selling a partial of his best note. There is a
another desirable result of paying off his tax bill. He
will now be in a position to trade his second lien notes
at face value for other real estate, and not have tax
consequences. As usual, be sure to ask your CPA
about the tax implications of taking back a note, or
selling a note.
If you have a note you want to convert to cash, contact
me for professional pricing.
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This is the date the note is signed
and in force. Not to be confused with the first payment
date. The origination date starts the interest clock
For example if the note was signed on
and the first payment were 2/01/08, the origination
date is 1/07/08. The first payment would reflect
interest from 1/07 to 1/31