Sub2 Empire

📢 We're revolutionizing the real estate industry through the power of creative financing. Find out more at https://sub2empire.com.

What is "dealer status" in real estate? In this live, we'll discuss how to avoid dealer status on your seller finance deals.

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What is dealer status and how do you get that designation?

If a real estate investor goes into a deal with the intent to sell the real estate, they can and likely will be considered a "dealer" in the eyes of the IRS. This status does not apply to all of your deals, but is considered on a deal by deal basis.

Examples of activities considered dealer activities would be fixing and flipping and wholesaling real estate. This is considered active income, not rental income and subject to dealer status. Dealer transactions are taxed differently than investment income. Investor status is taxed as capital gains, dealer status is taxed as ordinary income PLUS self-employment tax (15%+).

This rule also applies to installment sales and unfortunately, dealer status means that you are taxed on the ENTIRE gain. Here is an example:

Let’s say that you bought a house in January at $100k (this is your cost basis). You then sold that property to an owner-occupied buyer on installments for $150k. You have a $50k gain in that transaction. Maybe you took a down payment of $10k and you’ve received principal and interest payments of $800 / month for the entire year.

Your tax basis IS NOT your down payment and the principal / interest income. Your tax basis for that year is $50k!

Example:

Let's say you’re in the 30% tax bracket. That means on that $50k gain, you will pay (ballpark) $15k in ordinary income, PLUS an additional $7600 in self-employment tax (FICA - Social security and all of those wonderful “benefits” brought to you by your federal government). If you have zero deductions, your tax liability on $50k of earnings would total out to over $22k, but you’ve only taken $19,600 in income on the property. Do you see the problem here?

"But Jeff, don’t you sell all of your properties on installment sales?

Yes! All of my SFR properties are sold on installments. (contract for deed, mortgage wraps, etc.)

The question then becomes “how do you avoid being tagged as a dealer in your business?”. The short answer is… I DON’T.

You have to think about the activity you’re doing and plan for its tax ramifications. One of the benefits of being tagged as a dealer is that you get to take deductions on your activities, so you can decrease your tax liability through those deductions.

Here are my recommendations / suggestions on how to avoid dealer status on your real estate deals:

1. Hire the right tax professional. Make sure you’re tax strategist or CPA understands real estate and has a large investors customer base.

2. Just like your flips or wholesale deals, you get to take deductions in the form of business expenses on each deal. Take as many deductions as you possibly can to offset your earnings and, ultimately your tax liability. Think capital purchases that you can depreciate over time, fix up costs, materials, utilities, etc. (all of the same deductions that you take on a regular flip).

3. Sell your property on a lease-purchase or lease-option. Rent the property for 12-18 months before seller financing. This establishes your intent to rent the property.

4. Start a C-Corp and let the C-Corp be the dealer since C-Corps only pay 21% in taxes

Do the math on all of your deals! The math doesn't lie. If your tax liability is greater than the income generated in 1-year's time, you may want to reconsider the seller-financing model.

Subscribe to Sub2 Empire on Soundwise

📢 We're revolutionizing the real estate industry through the power of creative financing. Find out more at https://sub2empire.com.

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Want to know what to do if you’re seller has agreed to subject-to but wants to buy another home after the sale?

Let's break this down...

You have come to an agreement with your seller to buy their property subject-to the existing mortgage. You are taking over the responsibility of paying their mortgage in exchange for the deed to the property. You will be making the payments directly to the lender. It MAY be the case that your seller is going through a rough patch and you’re saving their credit. Or you’re buying their property that has virtually no equity, but YOU, as a smart investor, realize that the property has the potential to cash flow rather well.

The stars are aligning, and then out of nowhere, you’re seller says “will I be able to buy another house if we do this deal?”. All of the sudden, you’re a deer in the headlights

What do you say? What do you do in that situation?

There are a couple of ways to handle this situation. Our job, as investors, is to solve problems. The trick to getting this deal to the closing table is having solutions to the problems that will undoubtedly arise.

What do you do when you’re presented with this question (will I be able to buy another house if I have a mortgage on this house?)

Here’s what you're going to do.

1st, we’re going to look at the property itself. Is this a rental property? If this is a rental property, the lending guidelines imposed by secondary market note buyers (i.e. Fannie, Freddie, etc.) will allow for 75% of the rental income to be credited toward the borrowers DTI. See this link for information... https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-3-Income-Assessment/Section-B3-3-1-Employment-and-Other-Sources-of-Income/1032995141/B3-3-1-08-Rental-Income-05-04-2022.htm

This will required that you work with your seller to provide documented evidence of rental income. This can get a little complicated because the borrower is no longer the owner of the property once you close on the deal.

You do have another option. Fannie allows for debt paid by others to be 100% excluded from a borrowers DTI. See this link for more information... https://selling-guide.fanniemae.com/Underwriting-Borrowers/Liability-Assessment/Monthly-Debt-Obligations/Debt-Paid-by-Others/1047098271/When-can-debt-paid-by-others-be-excluded-from-the-DTI-ratio.htm

All that is required to comply with Fannies policies for 100% debt exclusion is simply writing a letter (actually an affidavit) stating that we are “obligated” to make the borrower’s monthly mortgage payments. We have been very successful with this strategy. Our affidavit has been accepted as evidence 100% of the time. But let’s say that property in question is the seller’s primary residence and NOT a rental property. How can you still buy the property without affecting the seller’s debt to income ratio and still be legally protected as the owner of that property?

The answer is pretty simple…

You buy the property on a mortgage wrap. The seller’s loan stays in place, but you’re going to “wrap” their mortgage with a new one. This is accomplished through an “all-inclusive trust deed”. How does this prevent the debt to income problem? How does this keep the sellers new lender from applying the original mortgage to your sellers DTI?

When your seller sells on a mortgage wrap, there are usually terms in the mortgage that provide the seller with INCOME. This not only wipes out the debt but your seller can declare any profit off of a seller-financed mortgage as income. This will offset the DTI deficit. So, here is how this looks in the eyes of the lender...

The borrower (your seller) has sold the property in question. Not only have they sold the property, but they sold it on installments of which they are now generating income off of the principal/interest income is directly applied and actually DECREASES their DTI ratio. You now hold legal title to the property.

Don’t get me wrong, we would much rather take title via subject-to (it’s a cleaner solution), but the DTI problem exists in MANY, MANY situations, and buying on a mortgage wrap can definitely a solution to this problem.

Subscribe to Sub2 Empire on Soundwise

What is "dealer status" in real estate? In this live, we'll discuss how to avoid dealer status on your seller finance deals. Visit us over at https://sub2empire.com.

----------------------------

What is dealer status and how do you get that designation?

If a real estate investor goes into a deal with the intent to sell the real estate, they can and likely will be considered a "dealer" in the eyes of the IRS. This status does not apply to all of your deals, but is considered on a deal by deal basis.

Examples of activities considered dealer activities would be fixing and flipping and wholesaling real estate. This is considered active income, not rental income and subject to dealer status. Dealer transactions are taxed differently than investment income. Investor status is taxed as capital gains, dealer status is taxed as ordinary income PLUS self-employment tax (15%+).

This rule also applies to installment sales and unfortunately, dealer status means that you are taxed on the ENTIRE gain. Here is an example:

Let’s say that you bought a house in January at $100k (this is your cost basis). You then sold that property to an owner-occupied buyer on installments for $150k. You have a $50k gain in that transaction. Maybe you took a down payment of $10k and you’ve received principal and interest payments of $800 / month for the entire year.

Your tax basis IS NOT your down payment and the principal / interest income. Your tax basis for that year is $50k!

Example:

Let's say you’re in the 30% tax bracket. That means on that $50k gain, you will pay (ballpark) $15k in ordinary income, PLUS an additional $7600 in self-employment tax (FICA - Social security and all of those wonderful “benefits” brought to you by your federal government). If you have zero deductions, your tax liability on $50k of earnings would total out to over $22k, but you’ve only taken $19,600 in income on the property. Do you see the problem here?

"But Jeff, don’t you sell all of your properties on installment sales?

Yes! All of my SFR properties are sold on installments. (contract for deed, mortgage wraps, etc.)

The question then becomes “how do you avoid being tagged as a dealer in your business?”. The short answer is… I DON’T.

You have to think about the activity you’re doing and plan for its tax ramifications. One of the benefits of being tagged as a dealer is that you get to take deductions on your activities, so you can decrease your tax liability through those deductions.

Here are my recommendations / suggestions on how to avoid dealer status on your real estate deals:

1. Hire the right tax professional. Make sure you’re tax strategist or CPA understands real estate and has a large investors customer base.

2. Just like your flips or wholesale deals, you get to take deductions in the form of business expenses on each deal. Take as many deductions as you possibly can to offset your earnings and, ultimately your tax liability. Think capital purchases that you can depreciate over time, fix up costs, materials, utilities, etc. (all of the same deductions that you take on a regular flip).

3. Sell your property on a lease-purchase or lease-option. Rent the property for 12-18 months before seller financing. This establishes your intent to rent the property.

4. Start a C-Corp and let the C-Corp be the dealer since C-Corps only pay 21% in taxes

Do the math on all of your deals! The math doesn't lie. If your tax liability is greater than the income generated in 1-year's time, you may want to reconsider the seller-financing model.

Subscribe to Sub2 Empire on Soundwise

Join us this, and every Sunday morning at 9AM Central for the Sub2Empire Creative Q&A Roundtable. Visit us at https://sub2empire.com

---------------------------

How to avoid becoming cash poor in real estate through cash preservation.

Why it’s so important for business owners to remain as liquid as possible and how to maximize the velocity of money.

A lot of people don’t fully understand what it means to be “cash poor” until it's too late. Being cash poor is one of the worst feelings in the world because your bills don’t stop rolling in just because you run out of the cash to pay them. If you own real estate (rentals or if you’re funding your own rehabs), you still have repairs to make.

What happens is that new investor start dumping their own money into their deals believing this is how to invest in real estate. Before they know it, they’re out freaking out because they see that they have obligations on the horizon with no way to pay them.

Even if you hire a coach or mentor, they don’t talk about this enough. Most of us don’t come into this business with load of cash. That’s why we’re getting into this business, right?

In this video we talk about a simple mindset and strategy that will ensure that you are never have to go through this...

Borrow on your real estate deals. Use other people's money (OPM) to buy real estate. Do not tie up a bunch of your own cash to buy properties.

Terms matter. A lot of gurus will tell you that the cost of the money you borrow doesn’t matter, but they’re only giving you half the story. How much you pay for the money you borrow comes into play over time.

Here are the best sources for funding your deals from best to worst:

a. Private lending

b. Commercial lending

c. Hard money lending – this is your last resort

So what do you do with your cash?

Become the bank (hard money lending). Keep 12 months of reserves, lend the rest. Lending will generate additional cash flow.

Subscribe to Sub2 Empire on Soundwise

📢 We're revolutionizing the real estate industry through the power of creative financing. Find out more at https://sub2empire.com.

---------------------------

How to avoid becoming cash poor in real estate through cash preservation.

Why it’s so important for business owners to remain as liquid as possible and how to maximize the velocity of money.

A lot of people don’t fully understand what it means to be “cash poor” until it's too late. Being cash poor is one of the worst feelings in the world because your bills don’t stop rolling in just because you run out of the cash to pay them. If you own real estate (rentals or if you’re funding your own rehabs), you still have repairs to make.

What happens is that new investor start dumping their own money into their deals believing this is how to invest in real estate. Before they know it, they’re out freaking out because they see that they have obligations on the horizon with no way to pay them.

Even if you hire a coach or mentor, they don’t talk about this enough. Most of us don’t come into this business with load of cash. That’s why we’re getting into this business, right?

In this video we talk about a simple mindset and strategy that will ensure that you are never have to go through this...

Borrow on your real estate deals. Use other people's money (OPM) to buy real estate. Do not tie up a bunch of your own cash to buy properties.

Terms matter. A lot of gurus will tell you that the cost of the money you borrow doesn’t matter, but they’re only giving you half the story. How much you pay for the money you borrow comes into play over time.

Here are the best sources for funding your deals from best to worst:

a. Private lending

b. Commercial lending

c. Hard money lending – this is your last resort

So what do you do with your cash?

Become the bank (hard money lending). Keep 12 months of reserves, lend the rest. Lending will generate additional cash flow.

Subscribe to Sub2 Empire on Soundwise

Walk through the details of a land trust contract and learn how a setting up a land trust can protect you from liability and lawsuits.

Join us on Sunday, January 1, 2023 and every Sunday morning at 9AM Central.

Subscribe to Sub2 Empire on Soundwise

📢 We're revolutionizing the real estate industry through the power of creative financing. Find out more at https://sub2empire.com.

Walk through the details of a land trust contract and learn how a setting up a land trust can protect you from liability and lawsuits.

Join us on Sunday, January 1, 2023 and every Sunday morning at 9AM Central.

Subscribe to Sub2 Empire on Soundwise

Join us this, and every Sunday morning at 9AM Central for the Sub2Empire Creative Q&A Roundtable. Visit us at https://sub2empire.com

---------------------------

How to avoid becoming cash poor in real estate through cash preservation.

Why it’s so important for business owners to remain as liquid as possible and how to maximize the velocity of money.

A lot of people don’t fully understand what it means to be “cash poor” until it's too late. Being cash poor is one of the worst feelings in the world because your bills don’t stop rolling in just because you run out of the cash to pay them. If you own real estate (rentals or if you’re funding your own rehabs), you still have repairs to make.

What happens is that new investor start dumping their own money into their deals believing this is how to invest in real estate. Before they know it, they’re out freaking out because they see that they have obligations on the horizon with no way to pay them.

Even if you hire a coach or mentor, they don’t talk about this enough. Most of us don’t come into this business with load of cash. That’s why we’re getting into this business, right?

In this video we talk about a simple mindset and strategy that will ensure that you are never have to go through this...

Borrow on your real estate deals. Use other people's money (OPM) to buy real estate. Do not tie up a bunch of your own cash to buy properties.

Terms matter. A lot of gurus will tell you that the cost of the money you borrow doesn’t matter, but they’re only giving you half the story. How much you pay for the money you borrow comes into play over time.

Here are the best sources for funding your deals from best to worst:

a. Private lending

b. Commercial lending

c. Hard money lending – this is your last resort

So what do you do with your cash?

Become the bank (hard money lending). Keep 12 months of reserves, lend the rest. Lending will generate additional cash flow.

Subscribe to Sub2 Empire on Soundwise

Walk through the details of a land trust contract and learn how a setting up a land trust can protect you from liability and lawsuits.

Join us on Sunday, January 1, 2023 and every Sunday morning at 9AM Central.

Subscribe to Sub2 Empire on Soundwise

Turn your videos into live streams with Restream https://restre.am/ANIm

Join us on Sunday, December 18, 2022 and every Sunday thereafter!

Subscribe to Sub2 Empire on Soundwise