Help, an important Question

[rfk]

I know all of you are busy now, but would appreciate some thought(s).

I have a client who is paying principal and interest to the seller of the building and land he bought for use in his business (an S Corp.) He pays money to the seller monthly who then remits to the appropriate bank, etc., I believe. My client is not on title.

At the time of preparing his 2006 tax return, I asked about whether he was on title for the occupied building, and the responsible party, but he said that he was not on title. So I said that he could not take the deduction for this expense because of this circumstance. So months later, he wants to get a loan for his business, but the bank who has knowledge of his payments or supposed ownership wants to see a tax return (2006) that reflects either the rent of this building or titling of this building. But for renting purposes, he does not want to 1099 the person the payments are made to, I guess because of the actual sale relationship and not a rental relationship. This is real a problem I see and I have told him about that.

I am willing to help him create an accurate, amended 2006 return, via an appropriate situation, but I want to be sure that everything reflects an accurate picture. Can something be done in regard to using a Form 8275-R for disclosing this situation, or is he just out of luck in regard to his options until he transfers title? I really don’t know what Reg. section would address this situation anyway to put on Form 8275-R, because this is required on the form. Main thing is to put it on this form to Disclose. Is this the right thought?

Thanks for your help and comments.

Ray

[Snaggletooth]

Avoiding the problem

Ray, the heart of the problem is your client's refusal to issue the landlord a 1099 for rent.
Lots of people don't want to receive them because they know they are having this revenue turned in to the IRS. Some of them don't want to pay taxes, others just simply do not want any income on record because it may disqualify them from one thing or another.

It sounds like there has been discussion, including yourself, about the alternatives that exist to prevent the need for a 1099 so that all parties will remain happy. In other words, working around the problem instead of meeting it head on. For example, your "solution" of sending an 8275 is a worse scenario. Form 8275 is nicknamed the "Please audit me" form by those of us in the tax business.

And worse still, Form 8275 does not even remove the requirement to issue a 1099.

Another fallout from failure to meet the problem: His bank is also confused and smells something strange about this.

All of us have clients who don't want to do this or that. We have to meet them head on. Sometimes we lose them, and we know this when we confront them. These clients will look around for someone in the community to prepare their taxes who will do what they pressure them to do. The tax preparation industry should be so ethical that this guy would not be able to find someone who would go along with failure to issue a 1099. But sad to say, they nearly always find someone to dance to their song.

You've got a good question, but you should decide what kind of preparer you are going to be.

[S T]

Contract Type

is this what is referred to as a 'wrap around contract" a "land contract", what type of contract? What State?

Sandy

[rfk]

Help... Follow-up Snag & Sandy

Snag,

Thanks for your comments, Snag. I am of the notion that I want to be the preparer who is totally ethical. I have worked too hard to be where I am at and then only to lose it all would not be okay. I have conveyed this clearly to the client, and he agrees to this.

Sandy,

I have heard of a wrap around mortgage, but I am not sure if this is or was the intent of the client and the seller. Can you elaborate on this and send me in the right direction about the nuances of this mortgage. Maybe it will fit his situation. We are in northern CA, northern San Joaquin Valley.

Thank you, again.

Ray

[Snaggletooth]

Ray

Hi Ray - the landlord does not have rent to report if he is actually SELLING the property to your client. But it sounds like the arrangement is not known.

The transaction must either be a rental arrangement or a purchase. If it is a rental-purchase, it will need to be treated as one or the other.

Matt has given you good advice -- the creation of the LLC gives the corporation a vehicle to pay rent to your client. Keeping the building OUT of the corporation protects the corp from having to realize full-up appreciation in the event of disposition.

[veritas]

Wrap around

It most likely could cause the bank to call their loan if they found out.

[S T]

Sounds

Like a Land Contract! Still, if the bank holding the note found out about it, they could exercise the "due on sale" clause. Could be Ray's t/p didn't have enough down payment or couldn't obtain financing or the seller didn't want the capital gain.

Wonder if the seller is reporting on the installment sale?

Haven't seen too many of these in the last 10-15 years.

Matt gave some good advice.

Sandy

[taxxcpa]

Wrap-around

It most likely could cause the bank to call their loan if they found out.

Yes, if you sell with a wrap-around contract, you have to have to have the permission of the company to which you owe your mortgage. With a land contract or, as it is called in Texas, a contract for sale, you do not need the mortgage-holder's premission.

I sold a house that way a few years ago while I still owed money on the mortgaeee. After I psid the mortgage off, I left it as a Contract for Sale rather than issuing a Warranty Deed. If the buyer ever pays me in full, I would then need to give him a Warranty Deed.

Meanwhile, he pays me an escrow payment, I pay taxes and insurance when due and he is able to get a homestead exemption based on the Contract for Sale which makes him the owner for tax purposes. I report the interest he pays as income, but do not report the principal since it was the sale of my home and the gain is not taxable.