From: "twice.redeemed@gmail.com" 
Newsgroups: misc.invest.real-estate  misc.legal  misc.taxes
Subject: Re: Real Estate Investment Tax Question
Date: Mon, 26 Nov 2007 15:52:33 -0800 (PST)
	posting-account=4uWogAoAAABvucZ1AKMNkir1yWqncc6B
	SV1),gzip(gfe),gzip(gfe)
Bytes: 3441

On Nov 26, 3:43 pm, mproo...@hotmail.com wrote:
> I apologize for cross-posting if any of the above newsgroups are
> inapplicable.
>
> A friend asked me about the legal (tax) implications if he:
>
> 1) Receives a $1M loan to buy a rental property
> 2) Uses the $1M to purchase a rental property, A
> 3) Uses A as 100%+ collateral for a $750K loan
> 4) Uses the $750K loan to purchase a second rental property, B
> 5) Uses B as 100%+ collateral for a $500K loan
> Wash.  Rinse.  Repeat.
>
> He then rents out all of the properties for the same monthly payment
> as the loans used to purchase them plus any property taxes.  So the
> rent from A is used to pay off the loan and property taxes on property
> A, the rent from B is used to pay off the loan and property taxes on
> property B, etc.  All of this seems to be legal at this point.
>
> The plan is to claim no profit and thus pay no tax on the rental
> properties.  He claims that he has nothing to tax until he has a
> capitalization event.  I am neither a real estate expert nor a tax
> attorney but this doesn't make sense to me as the rental income is
> still income and the "loss" due to loan repayment and property tax is
> not the type of "loss" referred to in the tax code.  My assumption is
> that this is tax fraud and that he is responsible for paying income
> tax on all rents received but I haven't been able to find any
> California statute or case law that is sufficiently on point to
> convince him.  This would not be the owner's primary residence or
> anything like that... strictly investment property.
>
> Is there a name for this type of scheme and does anyone know what the
> typical penalty (in California) would be?
>
> If anyone has any information, please forward it to my email address:
> mproo...@hotmail.com
>
> Thanks in advance,
>
> - Matt

He can get the loan to purchase A, but beyond that he has no equity
for the following purchases. They are going to look at market value
minus what is owed, and that will be zero. Lenders aren't stupid, at
least prime lenders, they want to see collateral and equity in case
they have to foreclose.