When Do You Own a Property?

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If you rent a property for business purposes, you can take a full deduction for the rental payment. If you own a business property and are making payments, the mortgage interest is deductible (not the principal portion) and you get a depreciation deduction as well.

If you’re a savvy real estate investor, you probably read the above and said “duh”. But, it’s not always that simple. In fact, the name on the title often has nothing at all to do with who has “constructive ownership.” Following is an excerpt from Easy Accounting for Real Estate Investors:

“It is possible to buy a property and not record a title transaction. As an example, let’s assume that you are buying 123 Calle de Verde from Immanuel Rodriguez using a Land Trust. Mr. Rodriguez transfers the property into a Land Trust, a type of revocable trust, named 123 Calle de Verde Family Trust. There are three parties to a Family Trust – the beneficiary, the trustor and the trustee. Initially, the beneficiary and trustor are Mr. Rodriguez. You will be the trustee. In another document that is not recorded, Mr. Rodriguez transfers the beneficial interest to you. You now make payments on mortgage, property taxes and all other responsibilities of ownership. You also can lease the property. In all respects you are the owner, although the title does not show the recorded document. For accounting and tax purposes, you are the owner.

Using another example, assume you are buying a property at 987 Riverview Dr. from Mrs. Patel using a “subject to” agreement. In this case, you have paid Mrs. Patel something in addition to the mortgage and then are responsible for all payments on the mortgage. There are additional steps to this – such as becoming an additional insured with the insurance company. However, you are the owner of the property although it has all be accomplished with non-recorded documents.

CHECKLIST ITEM: Review your contracts with your CPA or attorney before the deal is consummated to determine whether you are buying or leasing the property. Remember that you do not need to be on the title in order to own a property. The contracts and the intent determine who owns the property.

CHECKLIST ITEM: If you have purchased the property, no matter what creative method you have used, you need to now determine the purchase date. Again, you may want to review the details with your CPA or attorney.”

Easy Accounting for Real Estate Investors covers hundreds of ideas and strategies to maximize the tax benefits of creative real estate investing.

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