Was thinking through strategies to offset gains from selling POH, and considering after selling them via rent credit could help stretch my money towards further infill using 1031. Can these dollars be applied towards the home only or also moving, skirting, decking, rehab, etc? Or maybe it helps justify a retail all inclusive purchase? Is the tax deferral worth all the overhead and paperwork for ~20 POH?
Appreciate any experiences or opinions here.
I don’t see how there are any gains at the end of a rent credit sale. Over the years you receive monthly rent from the tenant/buyer which you pay taxes on every year throughout the length of the program. Then at the end of the rent credit period, you receive one last payment and you sigh the title over to the tenant/buyer. At that point, there is no capital gain to protect yourself from having to pay through a 1031.
I thought that with rent credit you don’t count the credits as anything monthly and then only as a cash sale upon tenants decision to use the credits according to the rent credit agreement price.
If you depreciate your homes there should be a gain.
Let’s walk through it.
You rent a POH for, say, $300/month and you give the tenant 200 credits to go towards ownership of the home.
At the end of the year, tenant paid $3,600 which goes in with all the other income you received from lot rents, and POH rents.
On April 14th, you subtract the expenses of your business from that rental income and you pay your taxes. That is to say, you pay taxes on that $3,600 of income from that POH every year during the entire rent credit period.
You do this year after year until the tenant has accumulated enough credits to bang on your door and demand title to the home. You sign it over to him and the deal is done.
You receive no big payment for the home for which taxes must be paid.
All you got out of the deal was monthly rent payments that you paid taxes on during each year you received the rent. As far as the IRS is concerned, at the end of the rent credit period, you disposed of the property for $0.00. It is the same as if you hauled a junker home to the back 40 and set it on fire (like we do in SD – really.) If there is any basis left on the home (that had not yet been depreciated) you can take that as a capital loss — just like you would if tenant had so trashed it that it was not worth rehabbing and you would have disposed of it by hauling it to the back 40 and setting it on fire.
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Humm… so rent credit programs are pretty much equal to renting homes for awhile and then setting them on fire? Yeah, now that you say it, I guess you could say that is true in regards to the capital you have tied up in them. At least in my experience.
We’re in complete agreement on taxation of income.
What I don’t see discussed in this scenario is the basis and gain from the sale of the home, including depreciation.
For example: you bought this mobile home as part of acquisition of the Park for 10K from the prior owner, depreciated it over 5 years (while your tenant diligently earned rent credits), and then sold it to the current tenant for $12,000 = 12,000 credits. As a prudent investor you depreciated the home over 27.5 years which means ~$436 per year was also written off yearly on the value of that home, which over 5 years is $2,180.
Your basis for the home is 10K minus depreciation ($2,180) equalling $7,820. You sold the home for 12K (per rent credit agreement) and as a result your gain is $4,180. The IRS wants it’s money and will tax this amount accordingly. Do you pay the 25% rate on this gain or do you roll this money (along with the money from the 5 other homes you rent credited that year) into a 1031 portfolio for new homes?
Now if you sold the same home for 5K, then yes, you have no gain and this question is meaningless since you willingly sold the home for a loss. But I think most of us are acquiring our homes as part of Park acquisitions for at least the same as what the tenant will pay for them (if not more), but when you include depreciation there is a taxation implication in a lot of cases.
But you did not sell the home for $12,000. Rent credits are not dollars.
You could just as easily substitute grains of sand for rent credits. “If you rent this home and pay me the rent, every month you pay on time I will put 200 grains of sand in this jar. When the jar has 12,000 grains of sand in it I will sign the title of the home over to you.”
Nutty example, but if you think it through I think you can see that a rent credit has no value. It is pretty much the same as saying “If you pay your rent on time 120 times I will give you title to this home, or another home of equal value.” You need some way of keeping track of that. It could be grains of sand in jar. Or it could be numbers on a spread sheet we call “rent credits.” Whatever you use to keep track of it, it is not dollars.
As for you basis
The fact of the matter is you did not sell the home. You disposed of it for $0.00. I say that because you did not receive any monetary value for it. You received rent, but nothing to replace the capital you have in the home.
So where does that leave you in your example at the end of the rent credit term?
It would look like this:
So you would take a $7,820 capital loss on your taxes.
Here is another way of looking at it — So your tenant/buyer paid you 12,000 rent credits for the home; can you then take those rent credits and deposit them in you bank account? NO! Rent credits are not dollars. He paid in fairy dust.
How about we put rent credit aside and assume these are cash buyers? That way we don’t need to argue about whether this is cash based or not. 
Double hummm… So that would make it an installment sale. But how could that be? You were depreciating the home every year during the rent credit period.
If it was an installment sale you would have transferred ownership at the start. You would have then taken no deprecation on it since it was no longer your property. Then every payment would go into your pocket tax free until it equaled your basis at the time of the sale ($10,000). Then whatever you received after that ($2,000) would be taxable.
Right?
Cash buyer without any sort of mortgage. Just plain cash at move in, no special terms.
There would be a $2k taxable gain. Since you had not had the property for a year you could not 1031 out of it. And if you had it would hardly be worth it to 1031 if you could.
Thank you for your opinion on the matter.