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Tax question for Diane or anyone else

Discussion in 'Asset Protection/Taxes/Legal' started by triple J, Sep 20, 2007.

  1. triple J
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    triple J New Contributor

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    Hello,

    I have a tax question that my accountant isn't sure on the answer. The info first: I am participating in a first time program offered by the city of Utica and will be receiving a $40,000 check from them which technically is a deferred payment loan. The program is identical to the federal Home Funds that is given for acquisition, new construction or rehabilitation of affordable rental housing in identified districts. The deferred loan is amortized over 10 years at 0% interest and as long as I meet all requirements of the loan program, each payment is forgiven. In other words, if I rent to a low-moderate income tenant at a reduced rent, I get "free" money. So how is this taxed? The city says no taxes will need to be paid on my end- the discounted rent is the loan "payment". I don't want any surprises and make sure this makes sense before I sign.....

    Thanks!
     
  2. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    It looks like there was supposed to be a link that didn't work.

    Your best source for an answer to this will be the City itself. If they have the program, then they will disclose the state and federal tax treatment. Otherwise, it's a little bit like asking "Is this a good deal?" without knowing what "this" is.
     
  3. nomadjanet
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    nomadjanet Contributor

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    I have only one comment. Get the information from the city in writing. Take it to your accountant and then decide. What they "say" or "tell" you means nothing. Get it in writing, get the statute or the rule.
    Janet
     
  4. triple J
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    triple J New Contributor

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    Sorry. There wasn't a link. I was just trying to emphasize the deferred payment loan thing- a loan that I don't have to pay as long as I meet their requirements. The city isn't asking for a ss# or any tax info. I've asked time and time again about tax payments and they say they aren't reporting anything to the IRS and there's nothing to it. It seems like there should be more. They have no additional info because I'm the first one for the program. Unfortunately, or furtunately, the city hands out money to people for facade programs, etc all the time and I don't know how to treat the money. Income because I am not actually paying on the loan? I didn't know if anyone was familiar with the federal Home Funds programs because that's the program they're following on a city level. It just seems if I deposit $40k into my bank account there would be questions. Maybe I'm making more into this but it seems that an extra $40k would need some explaining... It seems questionable and I just don't know. Thank you though!
     
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  5. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Whew! I wish I had a little icon for "Danger, Danger". Forgiveness of debt is a taxable event. Just cause it's "just like" something else, which is a valid grant under a recognizable Act, doesn't mean it is taxed like the valid grant under a recognizable Act.

    The only reason they say it's not taxable is because "wink wink" we won't tell, if you don't tell? I wonder if any IRS agents are reading this forum? Have any cars with government plates been seen around the city offices of Utica, NY?

    I'm not sure it's even legal for a municipality to give money out like that without collecting a social security number. Geez, wait till Homeland Security hears about that one!

    You are VERY right in questioning the taxability. I'm completely astonished by the bad advice you've been given. Be very very careful. Is it possible that there is someone higher up in the city office that actually knows what is going on? Maybe this is under a valid Federal Grant program, and the person at the front desk just doesn't know it. Or maybe they really don't know what they're doing.

    On the other hand, paying tax on $40K if you're given $40K as a gift, isn't a bad thing either. Just be prepared to pay state and federal taxes on it.
     
  6. triple J
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    triple J New Contributor

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    This is not a Federal Grant- it's something the city made up on a whim! It's crazy! I can't even explain to you how wacky it is around here! The mayor just signed off on the funds and so did the comptroller. A third party attorney is handling the transaction.

    Here's what originally happened... The city approached me b/c my hubby and I were doing an extensive rehab on a couple of historical properties. They offered the federal Home Funds project to us as a way to get involved. They even had a big convention with the state and all these people and organizations from Albany about this and other programs avialable to stimulate investors. We agreed to do the program and the deal was that we would renovate an apartment and they would reimburse us for the cost with a forgivable deferred loan thru the Home Fund program- federal money. So we signed a commitment letter and we followed through and finished the project and put in the low income tenant. Well... it turns out the prior owner of the property (a man over the city Community Action program who bankrupted that non profit organization) had used Home Funds money 10 years prior on a 15 year loan and the property was no longer elegible. So the city, trying to make good on their end, said they would implement its own Home Funds program and give me the money. All along, even when it was Fed money they said there was no tax ramifications. Any time I asked them about it they would say that's between you and your accountant. This made some sense to me b/c I'm renting for below market rent and that would be my "payment". However, I don't trust the city to know what the heck they are talking about (which it's obvious they don't) and my accountant is scratching his head on this one...

    My delima is this: If I'm renting below market and I have to pay taxes is it worth is? If I'm going to be hit with, for example, capital gains tax I don't want to get hit with the loss of income due to the reduction of rent in addition to the tax. I'm at least glad to know that I'm not completely crazy with my thought process! :smx4:Whew!
     
  7. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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    Very interesting scenario. I am not even remotely qualified to give any advice on the topic. I just want to mention that I think it is very encouraging that a) the city approached you (your reputation is great), and b) It is very positive, in my opinion, that they are trying to find ways to keep their word even though the property does not qualify for the federal program.

    Definitively I think you have great things ahead of you in working with the city. I think that you will become the expert on the topic in the city, so this will bring more investors and possible partners to work with you. This will probably also help you in your intention of helping refugees.

    Good luck with this situation.
     
  8. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Well, back to the original question - what to do about this possible money.

    I see two questions: (1) Should you take the money? and (2) If you do, what do you do "tax-wise"?

    (1) Should you take the money?

    This is an economic question. I'll just make up some numbers for my example.

    Let's say you get $40,000, forgiven at $4,000 per year. You have to take a low rent tenant who pays you $10,000 per year. Or you could get a regular tenant at $18,000 per year.

    Which is better: $10,000 + $4,000 ($14,000) or $18,000

    You're better off doing a regular rental.

    Case #2:

    Same deal on the loan/grant, but the rental amounts are different:

    Low rent is $10,000, regular rent is $12,000

    Difference is:

    $10,000 + $4,000 ($14,000) or $12,000

    Low rent with the deal is better.

    Those are very rough examples. You would probably also look at the time value of the money (ie..you get $40K all at once up front) which most likely offsets the higher maintenance costs of a low rent tenant.

    Should you do it or not? Depends on the numbers. Take the emotion out.

    Question #2: How do you treat it for tax purposes?

    Based on what you said, I'm certain it's taxable. HOWEVER you have been told by a government official, that it is not.

    Two choices:

    (1) Report it. Take the high road and just pay the taxes.

    (2) Don't report it. If you don't, I STRONGLY urge that you include a disclosure on your tax return. On XX/XX/XX, taxpayer received a $40,000 grant from the City of Utica. Per conversations with government officials (name, title), taxpayer was advised that this grant was not taxable.

    That way - if the IRS questions you later, the worst you'll have to pay is the tax - the city will pay penalties and interest. PLUS you have started the Statute of Limitations running (which is 3 years from the filing date of the return - a few other rules, but that's the simplest way to remember it). If you don't do a disclosure, it could be considered fraud, which means the Statute hasn't started running yet.

    I would also log all phone calls and in-person visits with the person you talked to, date, time and their title.

    If your CPA will prepare a return with that information and signs off on it, then the CPA is also responsible as well for the accuracy.

    All in all, you're protected the best way that I know how.

    BTW, my husband was born in Buffalo and went to Alfred. He said his roommate was from Utica and that he totally believes everything you've said, including the confusion at the city level...
     
  9. royemunson
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    royemunson Contributor Read Millionaire Fastlane

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    Diane,

    I love how you are humble enough (perhaps not in just this post) to admit when you don't know the answer to something.

    I am an accountant as well (have not passed the CPA exam though) and found it funny how various CPA's would act like they knew everything about everything.

    I am learning that the more you're willing to learn, the better you become.

    Thank you for being here and sharing your wisdoms

    Joe:iagree::thankyousign:
     
  10. triple J
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    triple J New Contributor

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    First I wanted to say :thankyousign:Diane for addressing my questions and sharing your advice and :thankyousign:Andviv for your nice compliment. Yes, this is a strange place- but always interesting. I could tell you things that could blow your mind. I'm very good friends with the ex-Codes Commissioner and the head of City Corporation Counsel.

    Back on topic though... Initially, my accountant said he didn't think there would be "issues" but that he'd "ask around" so the project is complete and the tenant is in- at least for 10 more mos. She is excellent thus far so not worried about excessive maintenance. She's a 40 something single nurse with grown kids that don't live in the area. I am renting her the apartment for $490/mo. I could probably rent it for $600.

    low income= $4k per year plus $5880 = $9880
    market rent= $4k per year plus $7200 = $11200

    The rental rates still must go by the Home Funds program guidlines and the good news is they just raised the rates to where I could rent for $600/mo. next year. However, if the tenant works out well, I wouldn't jump the rent on her $100- probably bad biz. practice but knowing her situation, she just majorly downsized to my apartment f/a place she'd be in for 5 yrs. and would have to move again.

    Another thing to point out is I would get the $40k up front and I could either invest that money or pay off some high interest credit cards (making an immediate 18%).

    I just want to make sure I understand you correctly... If I'm hit with taxes, I will only be paying on $4k per year for the next 10 years and not on the upfront 40K? That seems to soften the blow a bit but when you break it down per year- it seems different.:bgh: Also would I pay a capital gains tax? Would I be able to offset the $110/month loss? FYI, If I were to sell the house I would have to pay the balance off- a note & mortgage will be recorded at the clerks office. I have a draft copy of it.

    Diane, based on all the info I've provided what would you do?:hl:

    Thanks again!
     
  11. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    The taxes are calculated based on the "forgiveness." If you sold after one year, you'd have to pay $36,000 back, so you haven't been given $40,000. You've been loaned $40,000 and had $4,000 of it forgiven. That's all that is taxable.

    On the loss - no there is no write off there. You have less income, so less tax.

    Just in general, and I'm really interested if anyone else has comments on this, I don't like doing "deals" on rent. I totally get that she's a great tenant and you want to help her out. But, I'm leary of just doing something for nothing - I've just had too many of those type of deals deteriorate (soon, they're late pays, etc..). Is there something she can do to "earn" the $110 that you're losing? Doesn't have to be elaborate or involved, just something so that there is a feeling of exchange.

    What would I do? If it was me, right now, in my situation, I'd take the money and pay the tax. If it was me without a CPA certificate or tax education company, I'd take the money, not pay the tax and do the disclosure. The only difference right now is that I'm too visible in the IRS's eyes to ever mess with something this relatively small. Plus, if I do something that's not right, and the IRS catches me, there's a higher chance that they might audit my clients as well. I wouldn't take that risk for my clients.

    Let me know how it goes.
     
  12. triple J
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    triple J New Contributor

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    Diane,

    Thank you, thank you! I feel much more relieved!

    The tenant is in and signed a year lease when the rental limit was $490 so I can't raise the rent until Aug. 2008. I will have to revisit what I'm going to do then. If I am "allowed" to charge market rent, then I sure would like to get it!

    We close on the loan on Friday. I'll let you know if something else pops up between then and now.

    Thanks again!
     
  13. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Glad to see you moving ahead! Keep us posted on how it goes.
     
  14. triple J
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    triple J New Contributor

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    Hello,

    I wanted to thank you again Diane for your expertise and wanted to let you know we closed on the "grant" (no ss#/tax id # required) and small blip was put in the paper as follows:



    Fort Schuyler Group gets rehabilitation grant
    UTICA - The Fort Schuyler Group has been awarded the city's first mixed-use grant for its rehabilitation project at 1319 Genesee St.

    The location, known as The Charles, was rehabilitated by Gary and Jennifer Wereszynski.

    Mixed-use developments re-use existing commercial and industrial space, turning them into an appealing downtown living option. The grants may be used for acquisition or rehabilitation of affordable rental housing in four districts:

    * Bagg's Square (East and West): From Water Street on the north, Seneca Street on the west, and Oriskany Boulevard on the south and east.

    * Central Business District: Bounded by Oriskany Boulevard on the north and Court Street and Hopper Street on the south, Broadway on the west and Charlotte Street on the east.

    * Arts District: Court and Hopper streets on the north to Oneida Square.

    * Brewery District: Varick Street from Columbia Street to Court Street.
     
  15. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Congratulations on the press!
     

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