Selling the Beneficial Interest of a Land Trust
By: Mr. Land Trust
For the past 19 years I have taught students how to create land trusts AND sell the beneficial interest (BI) on an installment sales contract. This is a great way to make money in the real estate business. The benefits of “being the bank” include; no vacancy during the closing process (if you sell to a tenant in possession), no real estate commission, no closing costs, earning arbitrage on your underlying loan and receiving a full retail price (sometimes, retail plus).
The risk of default is minimized when selling the beneficial interest of a land trust because if the buyer defaults you repossess the BI, you do not foreclose! This saves you months of foreclosure action and tons of legal fees (and lots of sleepless nights). This method also allows you to get the property back on the market quickly to increase your profits.
But what are the tax ramifications of getting your property back using this method of default? You obviously reported the sale to the IRS in the year in which you sold the BI to your tenant/buyer. Now, maybe years later, the buyer defaults and you need to put the property back “on the books.” What will your new basis be?
Let’s take an example. Say you sold the property three years ago for $200,000 and your basis at that time was $150,000. Your “gain on sale” would have been $50,000 (200,000 – 150,000 = 50,000). If you recognized gain over the last three years of $25,000 (including the down payment and monthly contract principal payments) then your new basis would look like this:
$200,000 sales price 3 years ago 175,000 Debt buyers owed upon default (200,000 – 25,000)
25,000 Unrecognized gain (50,000- 25,000)
150,000 Your new basis (175,000 – 25,000)
It is always a good idea to consult your professional accountant when making these calculations. However, your priority should be in getting the property back in your possession and either renting it or selling it again on an installment contract (or all cash, if that is your goal).
A footnote to selling homes using this method. I feel that providing a way for people who cannot qualify for conventional financing to buy a home is a noble cause. There are millions of Americans that cannot obtain a government back loan because 1) They are self-employed less than two years, 2) Have a low credit score, 3) Do not have access to 20% down payment, 4) Own a cash business, 5) Do not meet stringent underwriting standards.
If it were not for my generosity and willingness to “take a risk” on them, these folks would NEVER own a home. Consequently, I feel that an interest rate of 7-9% is a fair rate to charge the buyers considering the risk that I am taking. You might consider this technique in your real estate investment arsenal.
I encourage you to learn more by going to my FREE online training at: www.landtrustwebinar.com and text “reasons” to 206-203-2005 for my free booklet, “Reasons to Use a Land Trust.” You can also reach me the old fashion way by calling me at 866-696-7347 (I actually answer my own phone unlike most other businesses in America today).