H & P Capital Investments LLC
Issue 33
March 2008
Tax Traps and Notes
by Tom Henderson
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It is tax time again and I want to remind you of tax traps that many real estate professionals fall into every year when owner financing.

TRAP NUMBER 1. DEALER STATUS : Rehabbers or dealers who owner finance when selling their property, not realizing the IRS considers the Note to be the same as cash. In other words, you take back a Note of $10,000 when selling your property, you will owe taxes on $10,000. If you are in the 35% bracket, you will owe $3,500 in taxes. BE SURE TO GET ENOUGH DOWN PAYMENT TO COVER TAXES.

TRAP NUMBER 2. DEPRECIATION RECAPTURE: Your property qualifies as investment property, and you sell your property using owner financing. Although you can enjoy your Note being treated as an installment sale, where your taxes are paid in the year they are received, if you depreciated your property, your depreciation will be "recaptured" as income at rates as high as 25%. For example, you have an investment property you owned for years, and have depreciated it down to 0. You now sell your property for $100k. Since your basis is now 0, you can owe as much as $25,000 in taxes. OUCH!!!!!

Besides getting enough down to pay the Inferno Revenue, another solution many professionals are taking is selling a portion of their Note to pay their taxes.

A case in point was a rehabber who had sold several properties using owner financing. He owed $28,000 in taxes, but had only Notes to show for his profits. I was able to purchase 5 years of payments on one Note to get him his cash immediately to pay Uncle Sam. Given the circumstances, he was more than happy with the deal. He got the IRS off his back, but still would have a good Note, with a hefty balance in 5 years, while he is receiving payments from his other Notes.

In summary, be aware of the tax implications of owner financing. If you do not intend on selling your Note in a year, get enough money as a down payment to pay your taxes.

If you get caught in this trap, remember, you can always sell one of your Notes, or part of a Note to feed the Tape Worm of Government.

If you know of anyone who has a Note to convert to cash, contact me for professional pricing.
Remember, I will pay referral fees at the least, and will also split my profits if you would like to "co broker" a Note with me.

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Tom Speaks: Apartment Buying Seminar April 12

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Tom had the privilege to be invited to speak at the Austin Real Estate Networking Club in Austin, Tx last week. I want to thank :Phil Grove and Dawn Moss for their courtesy and hospitality. If you are in the Austin area, this is a very nice group, with a mix of veterans, intermediates and newbies. Check out their website for locations and times.

If you would like Tom Henderson to speak on real estate investing and owner financing with your real estate office or investment group. Contact me for availability.

Note Professor Notebook
by Tom Henderson

If you have not attended a Note Professor "How To Get Rich with Notes" class, be sure and purchase the Note Professor Note Book manual to enhance your knowledge of creative real estate financing and note buying and selling.

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GUARANTEE! You will learn at least one new usable concept to increase your profit in buying or selling notes and real estate.

Real Estate and Note Investing Education

Tom Henderson
H&P Capital Investments LLC