Land Leases Feed Families for Generations (CFFL 498)
Transcript:
Jack: Jack Butala Jill DeWit.
Jill: Hi.
Jack: Welcome to our show today. This episode, Jill and I talk about land leases and how they feed families for generations. Before we get into it, let's take a question posted by one of our members. On landinvestors.com online community. It's free.
Jill: Okay. Jered asked, "I could use help from my fellow Land Academy peers. My CPA just sent over her LLC's tax return for the first year in the land business. She claims we need to pay taxes on the full profit of our term's deals up front. So if we purchase the land for $2,000 and sold it for $8,000 with payments over five years, she claims the IRS is clear that we need to pay the taxes on the $6,000, the 6k profit up front.
With over 25 terms deals, that adds up to way more in taxes owed than revenue generated and would quickly put us out of the land business. We showed her the IRS tax code 453," this is smart, "with the unimproved land exemption but she claims it does not apply for certain reasons. Do any of you pay income tax on just the installment income as it comes, not all up front? Has this been approved by another CPA or am I or my CPA missing something?"
Jack: Jered, this is an excellent question and all week I've been saying, we choose the hard questions for a reason. I want you to promise me and I want you to send me a note at jack@landinvestors.com. Promise me that you're gonna go get a new CPA today.
Jill: And that's the answer to the question?
Jack: I can answer the question. I can get into this in great detail. I've gotten this question over the years. I had a former partner, Park McClusky, quite honestly who had the same problem with his tax person and he solved it by getting another one.
It has to do with their- you have two choices on how you file. How you keep books. On an accrual basis and a cash basis and I'm not gonna get into it because I don't want to expose myself from a liability standpoint, but your CPA is wrong. How could you pay money that you haven't made yet?
Jill: Mm-hmm (affirmative). That's what I think too 'cause what if the guy defaults on January 2?
Jack: That's right. Exactly.
Jill: That's not. You can't.
Jack: So sometimes professional consultants like that are very, very, very academic and brainy. And they are extremely risk adverse and they have their nose in a book to the point where they don't even know what reality is.
Jill: Right.
Jack: A lot of professors are like that. And this person is wrong.
Jill: Right.
Jack: If you have a question or you want to be on the show, reach out to either one of us on landinvestors.com. Today's topic, land leases feed families for generations. I love this. Jill's got a beautiful story for us. This is the meat of the show.
Jill: So we met this girl, we were at an event, where were we? I can't remember where, were we in Long Beach? I can't remember where we went.
Jack: Yeah, exactly.
Jill: Okay, it was a big investors group but they got all the investors from all over southern California really together. And they do this like twice a year. So I said, "Come on, Jack, let's go check it out. Let's just see who's here. See what this is all about. It's not just one group. It's all of the groups combined."
Jack: I love these, I love going to these events by the way.
Jill: You're being sarcastic.
Jack: My answer to Jill was, "Oh my gosh, pick me. Can we go to another one of these? I love to talk to people about real estate."
Jill: I know, but I drug you anyway. So that was funny. So anyway. So we arrive at this event and well it looks- well here's, this is the way Jack rolls too. So we get to the event, he's gotta eyeball it first and see if we're going in.
Jack: That's right.
Jill: So we're standing in line and Jack has to kind of peek in the room, do a quick little walk, check out the food and the beverage situation,