Everything has a price. When we seek to avoid leverage without risky debt, won't we have to give up something in return? When we want to capture property appreciation without actually owning it, how can we also control its use and upkeep? When we don't hold title to property, won't we lose our tax benefits? Read on pilgrim. You're going to like this …
Certainly holding an Option – a mere promise of future performance – isn't going to be as psychologically rewarding as holding free title, but by structuring an Option transaction carefully, this can be compensated for.
If we examine so-called tax benefits a little more carefully, we might discover that they aren't worth as much as they've been cracked up to be when compared to the costs of interest and risks of debt.
Real estate leases and options are both tax advantaged and inflation enhanced! They provide leverage free of debt and control without the risks of ownership!
Let's spend a little time dispelling some of the myths of ownership and taxes to see if we can't gain a more productive perspective on things. Why does holding a deed make us feel more secure? Why are deductions for interest and depreciation worth far less than we might suppose? Let's see.
All wealth is ultimately based upon pieces of paper that the court agree to recognize and uphold!
When we speak of owning property, what does that mean? What do we own precisely? What is the evidence of ownership that we use to prove our ownership? On what document does depreciable basis depend for tax shelter purposes? Let's start at the beginning:
While we're discussing government actions, civil forfeiture laws have been passed in recent years under Federal Drug Enforcement Agency (DEA) and Racketeering Influenced Corrupt Organizations (RICO) Act which enable government to size property of owners against whom no charges at all need be levied. In effect, the property itself is being arrested, and since it has no constitutional rights, it can be destroyed at will.
Once again we can see that ownership is based more on the promise of government that it will respect private property rights than on mere pieces of paper passed between buyers and sellers. There are other ways that ownership of properly is denoted and recognized besides holding a valid deed.
Consider The Following Benefits:
It's important to recognize the benefits that a lease can confer on the Lessee and take away from the Lessor. Likewise, it doesn't take a rocket scientist to figure out that, while the Lessor might be receiving either a lump sum payment or payments spread out over the term of the leasehold period; the Lessee would have the right to sub-lease the properly for a profit.
===>>Moreover, the Lessee would be able use the property in such a way that it produced benefits exclusively for him or her, excluding the owner entirely.
It would seem that there would be little to choose between being the owner of a fee simple estate in property or being the owner of a leasehold estate so long as the law gives each its full support. But what about the way the Internal Revenue Code differentiates between ownership of real estate and ownership of a lease on real estate? What happens to Depreciation? Amortization? Basis? Who gets to write down what? Knowing the answers to these questions and being able to structure transactions to obtain the specific tax benefits desired can make a measurable difference in profits.
You can make a lot of money WITHOUT owning real estate. I’ve done thousands of wholesale flip deals. I usually had less than $10 invested in obtaining an Option. My profits were $3,000 to $100,000 or more. I never “owned” the properties nor took on the risks of debt of ownership.