Land Trusts
Conveyance by Title-Holding Land Trust

How to Safely Assume Non-Assumable Loans Without Down Payment or Credit Qualifying-and Without Subterfuge or undue Due-On-Sale Clause Compromise! By Bill J. Gatten

Remember that TV ad of a few years back? The one where a guy eating a chocolate bar rounds a blind corner and smacks into a lady munching a peanut butter sandwich and Voila, the Reese's Peanut Butter Cup is born? Well, something similar has happened within the world of creative real estate. Grossly underrated, and all too frequently misunderstood, the Title-holding Land Trust has collided with the "Net Residential Lease," with some astounding results. Both devices-the Land Trust and the Net Lease-have been around for centuries; but only a select few professionals know beans about trusts in general; and even fewer have the slightest idea of what a land trust is. Talk to 100 attorneys and you might find one with a clue as to what happens when an Assignment of Beneficiary Interest in a title-holding trust is structured in tandem with a Net Lease (i.e., a Lease wherein the Lessee pays all costs of possession).

Despite an almost universal ignorance of land trusts, the fact remains that anyone residing in, and making payments on, a property owned by a revocable, beneficiary directed, inter-vivos ["Illinois-type"] title-holding land trust (phew!), need only be made a co-beneficiary in it, in order to reap the myriad benefits of homeownership. For the resident beneficiary, this trust/lease arrangement actually provides pride of ownership, use, occupancy, equity build-up, appreciation and income tax write-off [Belden, 70 TCM 274, Dec. 50,802(M) re. IRC Reg. �1.163-1(b); IRC 163 (h)4(D); Rev. Rul. 92-0105, etc.].

  • Passive Seller-Carry's with minimal risk of attachment to the property later by the other party's creditor judgement, tax lien, bankruptcy or marital dispute. In other words, all the benefits of Options, Wraps, Contracts for Deed, or even Equity Sharing without their inherent dangers and discomfort.
  • Legitimate payment take-over of virtually any loan, assumable or not, including VA, FHA, FNMA, GNMA and FHLMC: exceptions include loans to business entities, and "Land Sale Contract Loans (e.g., Cal-Vet loans)."
  • Airtight Seller-Financing, that puts a stop to unscrupulous sellers quietly (purposefully or negligently) encumbering a property further, or clouding its title.
  • Safe Seller Carry-backs wherein a defaulting party, theoretically, can notclaim "Equity" to thwart or forestall eviction and force the consuming Foreclosure Action.
  • Income property for virtually nothing down and nothing per-month: with no management, maintenance, vacancies or negative cash flow! One need merely become a co-beneficiary in a land trust, while another co-beneficiary lives in the property, takes care of it, and covers all of its costs, in exchange for tax write-off and perhaps a portion of its appreciation potential (say, 50%) and mortgage principal reduction.
  1. First, a seller, willing to keep the existing loan in his/her name (for a while), creates a land trust in his/her own name and places the property into it: i.e., Robert and Mary Jones vest the property with "The Robert and Mary Jones Trust." In that the trust is an inter-vivos (i.e., living) trust; and because it is directed solely by Robert and Mary; and since no sale of Real Estate has taken place; and since the trust is in the borrower's name only: there are no income tax consequences, and the lender's Due-on-Sale Clause is not violated. As a matter-of-fact, holding one's real estate in this manner is a prudent estate-planning device, whether conveyance of ownership is the objective or not [e.g., see: Get That Property out of Your Name-Using Land Trusts for Privacy and Protection, by Wm. Bronchik]. Federal law (the Garn-St. Germain Act of 1982) emphatically prohibits lenders from taking exception to a borrower's right to place its property into such a trust.
  2. Next, along with the property's use, occupancy and possession, a co-beneficiary interest in the trust (50%, 75% 90%, etc.) is assigned to a second party. Note that, although it can be forfeited at termination, at least a 10% beneficiary interest should always be retained by the seller, in order to conform to the IRS' 10% rule (i.e., no land trust beneficiary may hold less than a 10% interest); to discourage "Due-On-Sale" disputation; and to avoid a property tax reassessment.
  3. Then, an Agreement for Use and Possession between the trustee and the new co-beneficiary is created, whereupon the IRS, and most states (Tennessee and Louisiana not withstanding), characterize the resident beneficiary as an owner of an "IRC �163 Qualified Property," even though the real estate has itself been converted by the land trust to personalty. [See IRC �163(h)4(D) pertinent to real property held in estates and certain trusts, in which ownership is characterized as personal property]

Start by identifying the "Don't Wanters", whose owners, in order to alleviate their burdens, would keep the existing financing for a while. The newspaper is chock full of these properties under: "Tired Landlords,' 'Exasperated For-Sale-by-Owners' and 'The Very Desperate!"

Next, advertise for the "Must Havers" who-for ownership and tax deduction without Loan Qualifying or Down Payment-will eagerly assume the responsibilities of homeownership (the ad might begin: "The Benefits of Home Ownership can be Yours-No Bank Qualifying-No Down-Closing Costs Only").

The "Don't-Wanters" and the "Must Havers" are in endless supply! To help them both, and make money in the process, one need merely seek them out and stand in the middle.

Then order the book NO NEW LOAN, NO DOWN

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