Discussion:From the trailer park: What's taxable, what's not?
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Discussion Forum Index --> Basic Tax Questions --> From the trailer park: What's taxable, what's not?
Discussion Forum Index --> Tax Questions --> From the trailer park: What's taxable, what's not?
| 12 June 2008 | |
| New tax client. Buys vacant mobile ("manufactured")homes for about $1,000, repairs them, then sells them for about $8,000 via "seller financing" (typically holds a 4 or 5 year note).
6 months later, buyer typically defaults on the note, and my client sells the property to someone else. Cycle repeats itself regularly across all his properties. Here's my question. Regarding the monthly payments my client receives... does the whole monthly payment rget ecognized as taxable income? Or, is only the 'interest' portion of the monthly payment counted as income, with the principal portion classified as a return of capital? | |
| 12 June 2008 | |
| Look at the rules on installment sales (IRS Pub 537) - it describes how to account for repossession of property sold on installment and how the gain and new basis are calculated. | |
RoyDaleOne (talk|edits) said: | 12 June 2008 |
| If the seller is a dealer can the use of installment sale be made? | |
| June 12, 2008 | |
| And working thru the repo on all the installment notes wouldn't be worth all the accounting fees you could charge, even if he'd pay them. | |
Bushmaster (talk|edits) said: | 12 June 2008 |
| While not technically correct, I consider these rent to own and actually survived an audit once with this treatment. We recorded all the payments as income and interest. This was in an S Corp. When the client paid off (out of 50 of these land sale rent to own deals, less than 10 ever paid out), I simply wrote off the land thru COGS. The argument we used was, based on prior history, these people are really paying rent as most of them moved out on the weekend and left the property vacated. Also, the S Corp still held title to the property and the contract written up as buyer misses 4 consecutive payments, they are evicted.
The agent didn't want to go along with it until we pointed out that the Corp was recognizing income on every dollar they collected for the year and while it may make a difference in the first 2-3 years, after 10 years into this, with all the repossessions and sales in the same year, it really sort of evened out. Plus the fact that we weren't trying to get capital gains treatment either. | |
| 12 June 2008 | |
| Dealer dispositions of real or tangible personal property are not eligible for installment sale treatment (IRC Sec. 453(l) - that's a lower-case L, not a numeral one). However, if you can reasonably make Bushmaster's rent-to-own argument, that might work.
Depending on your state, these sales may be subject to sales tax, and the state may want the tax up front and not as the payments are collected. If you can really structure the contracts as leases with a purchase option, you may have a better argument for Bushmaster's rental treatment and also be able to pay the sales tax as the payments are collected rather than at the original sale date. | |
RoyDaleOne (talk|edits) said: | 13 June 2008 |
| KatieJ, I was asking, "is he a dealer", or, is he being treated as a dealer?
Is land (lot) included in the sale or just the trailer? There is confusing about his status as a dealer from the question. The answer as to whether he is a dealer or not could/would change a comment. Rent to own would require some form of a contract for deed/title. Here, in Florida such contracts involving a home are elevated in rights to be in effect a completed transfer of the title. That is repossession follows the same procedures as a mortgage foreclosure. The point is, at least in Florida, the rights conveyed by law would remove the transaction from the rent to own classification, because, by law this is treated the same as if title has passed. In other states this may not be the case. | |
| 13 June 2008 | |
| RoyDaleOne, thanks for your comments on this.
To answer your question, land (lot) is not included. All properties are located in mobile home parks where lot rent is paid. | |
| 13 June 2008 | |
| Anchorman's client sounds like a dealer to me; his business is buying, refurbishing and selling mobile homes. I don't think he can use installment treatment. If he doesn't want to recognize the entire gain at the date of sale followed by a loss on the repossession, I'd suggest changing the nature of the transaction from a sale to a lease. You'll need legal counsel to accomplish this and make sure it works under the laws of your state as well as for tax purposes. | |
