Phantom Income

In today's market, more and more investors are selling property on land contracts or through seller financing. Now, I believe that considering the present market condition - it is a great idea. Savvy investors will especially evaluate these two options this time of year for several reasons. 1) It's the way to "build a little warmth" in the time of year when the market goes cold. By using the LC (land contract) or SF (seller financing) you're able to generate that small piece of cash on the front end, at closing. In this time of year, it can be very helpful to generate even the smallest piece of downpayment cash in order to hold out for the warmer seasons when more properties are moving. 2) Investors with large asset loads and potentially large debt loads are looking down the barrel of that creepy part of the year know as Property Taxes. Boo. Ahh... These tax bills have probably started to roll in, and investor's are scratching their heads as to how to tackle them. Often times, if former years were lean, then they are trying to figure out how to cover more than just one year's tax burden. So, all in all, it is a very useful tool to have both the LC and SF in your quiver of real estate tools, but you need to be aware of one particular item: (But first, my disclaimer:)

***My disclaimer: I am not a tax professional, and this isn't advice. It is simply info for you.***

If you sell a house on an LC or SF you could possibly create for yourself a taxable event at the point of sale. As I'm sure you're aware, this event is most often referred to by investor's as "Phantom Income." Check in closely with your CPA about this, but here's how it works.

If you sell the house on a land contract or if you seller finance it you will be taxed on the the entire amount of your profit from sale in the same year that you close. You will also be required to pay capital gains tax since you did not live in the home as a personal residence. Illustration: If you've owned the property for over a year, you have 50K invested in it and you sell it on a LC or you SF to an owner for a purchase price of 80K - then you would be required to pay taxes on the $30K in profit (which is considered phantom income) even though you did not collect 30K. You wouldn't have collected the $30K at point of sale, because the buyer (in today's market in JXN) would have only put down probably some smaller amount like 2.5 or 3.0% at the closing table. It's something you need to be very careful about - especially if you plan on doing this with 10 or 15 houses all across the nation.

Lastly, there is one loop hole. You can sell this house on a LC or SF it and break up the experience of a taxable event if you sell the house on an installment sale. Ask your CPA about this. You can break up how you receive the profit to better line up with how you will be taxed in passing years.

I'm sure you're aware of these principles. I just wanted to be a helpful reminder of what to watch for. Now, If you need some help or you have a house you'd like to sell using these tools please contact me. I've packaged quite a few deals like this for my clients, and using my website (www.jxnhousing.com) it makes things easier. Contact me if I can help you. I welcome the call.