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Author: krisitef Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75888  
Subject: Using Mom's money Date: 6/11/2003 12:13 PM
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My husband and I have an opportunity to purchase a restaurant in the tourist town we live in. This restaurant has been established for 15+ years and is quite profitable. My husband has worked there for the past ten years, lately as a floor manager. He has a good feel for the business and a good rapport with the current owners. Here is the kicker. The owners owe $310,000 on an SBA loan for the building. They need this loan paid off before they can sell the restaurant and will owner finance the rest of the loan. The building would serve as collateral for the loan, but we have little cash in the bank, not close to 10%or 20% of the amount we would need. My husbands mother is 73, owns her house outright and has several hundred thousand dollars in IRA's, stocks, bonds, etc. What would be the tax ramifications (or other ramifications)if she cashed out enough to buy the building? She could then hold title for the building and rent it back to us. Any thought would be appreciated.
Thanks
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36516 of 75888
Subject: Re: Using Mom's money Date: 6/11/2003 3:25 PM
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Greetings, Krisitef, and welcome. You asked:

The owners owe $310,000 on an SBA loan for the building. They need this loan paid off before they can sell the restaurant and will owner finance the rest of the loan. The building would serve as collateral for the loan, but we have little cash in the bank, not close to 10%or 20% of the amount we would need. My husbands mother is 73, owns her house outright and has several hundred thousand dollars in IRA's, stocks, bonds, etc. What would be the tax ramifications (or other ramifications)if she cashed out enough to buy the building? She could then hold title for the building and rent it back to us.

If your M-I-L takes the entire $310K from previously untaxed monies in her IRA(s), then all of the withdrawal counts as income and she would owe ordinary income tax on the entire amount taken. Further, to avoid penalties on the distribution she almost certainly must make an estimated income tax withholding payment for the quarter in which she makes the IRA withdrawal. If she fails to do that, then not only would she still owe the income taxes, but she would also have to pay a very, very substantial penalty at income tax time.

If only some of the money comes from the IRA(s) and the rest from investments like stocks or bonds held in after-tax accounts, then the IRA withdrawal will still be taxed as explained above. For that portion of the funding derived from her other investments, she would owe capital gains taxes on any gains over her original basis in those investments. Again, it might be necessary for her to file and pay estimated income tax withholdings in the quarter the withdrawal from the IRA(s) and the liquidation of investments occur.

Regards...Pixy

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36523 of 75888
Subject: Re: Using Mom's money Date: 6/12/2003 8:38 AM
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Another idea, may or may not work. If you or you MIL own property you could possibly do a 1031 exchange. Essentially, sell your property and use the proceeds to by new property. It doesn't avoid taxes but delays any taxes due until the new property is sold.

JLC

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36525 of 75888
Subject: Re: Using Mom's money Date: 6/12/2003 10:29 AM
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Essentially, sell your property and use the proceeds to by new property.

It's a little more complicated than that, consult a real estate professional specializing in tax free exchanges BEFORE you sell your property.

buzman

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36530 of 75888
Subject: Re: Using Mom's money Date: 6/12/2003 8:51 PM
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Not to be a nervous nellie, but if the restaurant is so profitable, why do the current owners want to sell?

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Author: MEG Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36531 of 75888
Subject: Re: Using Mom's money Date: 6/12/2003 9:01 PM
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Ask Yourself:
What is the reason present owners want to sell?

Are the present owners also the operators?

How long have the present owners owned this busines?

Why do they still owe so much on the building?

Where have the profits been going?

Will they allow your accountant to go over their "books"?

Is the business as profitable as you are led to believe?

If you go ahead with this will MOM's new assets be protected if she ever gets put into a home. (Title of deed considerations)
Will this conversion of Mom's assets affect her present income and lifestyle?

Be sure you get advice from the SBA and take advantage of all of the resources they offer if you eventually go ahead with this.


MEG

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Author: magiquedarkayne Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36532 of 75888
Subject: Re: Using Mom's money Date: 6/12/2003 9:25 PM
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Not to be a nervous nellie, but if the restaurant is so profitable, why do the current owners want to sell?

Awright! no fair, hes being logical!...ROFL. Truer words etc. They may wanna retire or some other good reason, but I also would investigate it VERY thoroughly.

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Author: krisitef Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36544 of 75888
Subject: Re: Using Mom's money Date: 6/13/2003 9:17 PM
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They want to sell because the husband is ill and over 70, she is into landscaping and not into the restaurant.

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Author: krisitef Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36545 of 75888
Subject: Re: Using Mom's money Date: 6/13/2003 9:23 PM
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They want to sell because of illness and burnout. They have operated the business for 15-20 years. They leased the building until about three years ago when the took out an SBA loan for $500,000. If we could assume the loan they would let us and carry the loan, but apparently you can't assume an SBA loan. The profits have been spent like crazy by the current owners. They will let us go over the books, and I'm not sure about your last two questions, but we can sure get some legal advice. Thanks so much for everyone's input, it has been very helpful.


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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36557 of 75888
Subject: Re: Using Mom's money Date: 6/16/2003 11:29 AM
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<<My husbands mother is 73, owns her house outright and has several hundred thousand dollars in IRA's, stocks, bonds, etc. What would be the tax ramifications (or other ramifications)if she cashed out enough to buy the building? She could then hold title for the building and rent it back to us. Any thought would be appreciated.
Thanks
>>


Off the cuff, it doesn't sound like a wise investment for a 73 year old. Real estate is illiquid as you've discovered, and it's frequently easier to buy than to sell. This woman may have need for her assets and find that she can't get at her wealth when she might need it.


How about finding someone else in the town to make this real estate purchase? Actually, that should be the problem of the seller, who is apparently also discovering that real estate can be hard to sell.
It's quite common for real estate for such businesses to be owned by one person and leased to another, and it's also quite common for such businesses to be difficult to sell.

Why not simply offer to buy the business, and expect the owner to continue to hold the real estate and lease it to you? That would be a very common arrangement. The owner can then spend whatever number of years are necessary to find a buyer for this piece of commercial real estate. Better the present owner than your mother in law, in my opinion.



Seattle Pioneer


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Author: SeattlePioneer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36558 of 75888
Subject: Re: Using Mom's money Date: 6/16/2003 11:36 AM
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<<They want to sell because of illness and burnout. They have operated the business for 15-20 years. They leased the building until about three years ago when the took out an SBA loan for $500,000. If we could assume the loan they would let us and carry the loan, but apparently you can't assume an SBA loan. >>


You should plan to do the same thing they did. Buy the business, lease the building and consider buying the property from them when you are in a financial position to do so.


The business and the real estate are two quite different deals. They might find one person to buy both, but it's very likely that they wont, and they should be glad to find a qualified buyer for just the business and be willing to lease the property to you, reserving the option to sell the building if they find a buyer for it.



Seattle Pioneer

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Author: oliviacw Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36576 of 75888
Subject: Re: Using Mom's money Date: 6/18/2003 8:52 PM
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The business and the real estate are two quite different deals. They might find one person to buy both, but it's very likely that they wont, and they should be glad to find a qualified buyer for just the business and be willing to lease the property to you, reserving the option to sell the building if they find a buyer for it.

I agree with Seattle Pioneer. They should be able to hold onto the building, paying the mortgage with what you pay them for lease. Once the business has become profitable for you and you have money in the bank, you can buy the building - you might even be able to get an SBA loan yourself at that point.

- Olivia

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