Tax Planning for a "wrap" mortgage.

[equinecpa]

This is actually my own particular situation. I own a property I need to get rid of. I'm willing to let it go at about cost so little or no capital gains to worry about in this situation.

I'm considering a wrap mortgage but am perturbed about the tax consequences.

Here are the figures:

My ACB : $45000 (original cost $48500 less depn)
Note: $40,000
Sell price $50,000
Note back to me $10,000

My problem is that this will create investment interest income but I'm not going to be able to deduct the interest I pay because I don't itemize and even with this will not be close to itemizing.

So I'm creating taxable interest, and losing my rental interest deduction. Yikes! I'm not liking the tax consequences of this. So I need a better way to structure this - any thoughts...I"m willing to be creative ie use an LLC or corp or something if I can figure a way to structure to make the interest exp offset the income.

Thanks for any ideas!

Carolyn

[taxxcpa]

Wrap-around mortgage

I'm not sure you can sell with a wrap-around mortgage if you still owe a mortgage. I had a similar situation and looked into it. I believe your mortgage holder has to be notified and has to agree for you to sell it that way. However, there is something called a Land Contract I discovered-- in Texas it is called a contract for sale.

I sold the property with a contract for sale and was not required to obtain the permission of the company to which I owed the mortgage. Later I paid off the mortgage and am still collecting on the note, but, as you mention, I have to pay tax on the interest.
I do itemize my deductions, so before I paid off the mortgage, I was able to deduct the interest I paid as Investment Interest expense. Now I have no deductions against the interest I collect on the mortgage.

I bought another house and later wanted to do the same thing, but was unable to find a buyer so I rented it. I am much better off renting it than if I had sold it since I get a good depreciation deduction and can still deduct the interest I pay until I pay the mortgage off.

If you can rent the place, I think it is much better. I can pass on the rent house to my children and they can start depreciating it at a stepped-up basis when they inherit it.

It beats investing my money in the stock market.

[dsi]

Perhaps you can rent it for a few years with an "option to purchase"?

[equinecpa]

I really don't want to be in the rental business -the property is an hour away from my location...and is old so though in good repair now, I could see it needing quite a bit of work over the next few years.

I probably will end up a with a lease option on it but the problem with lease options is they really don't offer the seller a whole lot of benefits -the benefits go to the lessee...it'll tie up my property for the term of the lease option so if I find a ready and willing buyer I'm stuck.
I know people usually charge higher rent to compensate for the lease option but I doubt anyone would bite on that in the area the property is located. It already rents at $650, and could be bought for $300 a month...

If I do a wrap (I was basically meaning a contract for deed), could I perhaps quickdeed the property to a corporation...then the corporation should be able to offset the investment income with the investment interest no?

[taxxcpa]

Quick deed?

Maybe a quit claim deed would be OK. I don't think you could give a warranty deed without permission of the current mortgage holder. You should ask a real estate attorney. Bellinger & DeWolf in Dallas specializes in real estate. 214-954-9540 or Hilary at 214-615-4205.

There are rent-to-own and lease-purchase arrangements--they may be two different kinds of deals.

In this depressed real estate market, it would be better to rent, if possible, until the market improves. A real estate broker located in the same city as the property would probably charge one month's rent or less as a fee which would include finding a tenant and preparing the lease agreement.

[equinecpa]

My husband and I have hummed and hawed about renting the property. We fear if we rent it, it will take longer to sell. It'll be harder to show with tenants in the property and who knows what the place will look like when it is shown. Will the tenants clean up?

We could take it right off of the market completely and just rent it but I fear we could end up with a large repair that would negate the rent. We've just finished replacing windows, painting etc. and the place looks decent. The property is an hour away from where we live so maintenance and watching over tenants is a royal pain.

Back to tax plan...if the property were owned by a corporation (mine) would the corporation be able to claim the interest income and deduct the interest expense? I'm thinking it would. So if I quickdeeded to a corp I would be better off for tax purposes?