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Author: jayob Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121341  
Subject: Home sale selling price reduction issues Date: 8/18/2010 12:57 AM
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We sold our home in 2007 and carried back an interest only loan. The remaining principal was to be a lump sum payment in five years or less. The value of the home has dropped and we must agree to a reduced price. We paid tax on the portion of the gross profit that was covered by the down payment. Recalculating the profit with the new sale price results in no profit, so in retrospect, we paid unnecessary tax in 2007.

For example: The 2007 sale price was $910,000.
The basis was $350,000,including the cost of sale, thus our gain was $560,000.
The gross profit after the $500,000 exclusion was $60,000. The gross profit percentage calculates to be 6.6%.

We received a $250,000 down payment. As 6.6% of that was calculated to be profit, we paid tax on 6.6% of $250,000, or on an income of $16,500. This was all reported on form 6252 with the 2007 taxes.

We carry an interest-only loan on the $660,000 unpaid balance. We have received interest and we paid tax on the interest. We have received no further principal and no additional form 6252s have been filed.

Now we have to accept less for the home. Instead of $910,000, we will receive a total of $850,000, a reduction of $60,000.

Had the $850,000 been the original sale price in 2007, there would have been zero gross profit, and we would not have paid tax on $16,500 income with our 2007 taxes.

Q1: How should the final sale be reported?

Q2: Can we get any of the tax back we paid with the 2007 taxes?

Q3: Are there any other issues to be concerned with?
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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110911 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/18/2010 10:11 AM
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Now we have to accept less for the home. Instead of $910,000, we will receive a total of $850,000, a reduction of $60,000.

Why? Is that in the original contract? You have a mortgage for $660,000 on a house worth $850,000. There's still over 20% equity. A lot of banks would like that deal. Why should you take less? And the balloon isn't due until 2012. Why settle for less early? Just because they make you a lower offer? That's your call, but only if your primary reason is to get the cash earlier rather than later. You hold the mortgage, and the buyers have $250,000 of equity in it. They're not going to walk away from that. You are not liable for the fact that the market went down.

As to your tax question: you don't get to amend the return for the year of sale for subsequent adjustments to an installment sale.

You will, however, have a capital loss on disposition/settlement of the installment obligation.

You basis in the mortgage is 616,440 ($660,000 less the GP% of 6.6%)
You will receive the reduced amount of 600,000
For a loss of 16,440
And guess what - that's equal (with rounding) to the gain reported in the earlier year(s).

This is spelled out in IRS Pub. 537, Installment Sales.


Bill

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Author: jayob Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110912 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/18/2010 12:24 PM
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/quote/
You will, however, have a capital loss on disposition/settlement of the installment obligation.

You basis in the mortgage is 616,440 ($660,000 less the GP% of 6.6%)
You will receive the reduced amount of 600,000
For a loss of 16,440
And guess what - that's equal (with rounding) to the gain reported in the earlier year(s).

This is spelled out in IRS Pub. 537, Installment Sales.
/end quote/

Bill, Thanks for the "good news" on the reportable loss. Can you help me to find that in Pub. 537?

Jay

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110913 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/18/2010 12:53 PM
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/quote/
You will, however, have a capital loss on disposition/settlement of the installment obligation.

You basis in the mortgage is 616,440 ($660,000 less the GP% of 6.6%)
You will receive the reduced amount of 600,000
For a loss of 16,440
And guess what - that's equal (with rounding) to the gain reported in the earlier year(s).

This is spelled out in IRS Pub. 537, Installment Sales.
/end quote/
==============================
Bill, Thanks for the "good news" on the reportable loss. Can you help me to find that in Pub. 537?

Jay

=============================
Here's a link to the pub. See page 11, Rules to Figure Gain or Loss.

http://www.irs.gov/pub/irs-pdf/p537.pdf

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Author: jayob Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110914 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/18/2010 3:12 PM
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You will, however, have a capital loss on disposition/settlement of the installment obligation.

You basis in the mortgage is 616,440 ($660,000 less the GP% of 6.6%)
You will receive the reduced amount of 600,000
For a loss of 16,440
And guess what - that's equal (with rounding) to the gain reported in the earlier year(s).

This is spelled out in IRS Pub. 537, Installment Sales.


Bill, Thanks for the "good news" on the reportable loss. Can you help me to find that in Pub. 537?

Here's a link to the pub. See page 11, Rules to Figure Gain or Loss.
http://www.irs.gov/pub/irs-pdf/p537.pdf


Very interesting. Much appreciated. Now all I need are gains to offset the loss!

Jay

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110915 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/19/2010 3:56 PM
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jayob: Fort whatever reason, you chose not to address wradicals's question . . .

Why are you accepting less?

"We sold our home in 2007 and carried back an interest only loan. The remaining principal was to be a lump sum payment in five years or less. The value of the home has dropped and we must agree to a reduced price. We paid tax on the portion of the gross profit that was covered by the down payment. Recalculating the profit with the new sale price results in no profit, so in retrospect, we paid unnecessary tax in 2007.

For example: The 2007 sale price was $910,000.
The basis was $350,000,including the cost of sale, thus our gain was $560,000.
The gross profit after the $500,000 exclusion was $60,000. The gross profit percentage calculates to be 6.6%.

We received a $250,000 down payment."


If you received a $250,000 down payment, has the home dropped in value by more than $250,000?

If not, why are you eating any of the loss in value?

Also, I assume arguendo that installment reporting was properly available in the year the sale closed.

Regards, JAFO

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Author: jayob Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110916 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/19/2010 7:08 PM
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jayob: Fort whatever reason, you chose not to address wradicals's question . . .

Why are you accepting less?

"We sold our home in 2007 and carried back an interest only loan. The remaining principal was to be a lump sum payment in five years or less. The value of the home has dropped and we must agree to a reduced price. We paid tax on the portion of the gross profit that was covered by the down payment. Recalculating the profit with the new sale price results in no profit, so in retrospect, we paid unnecessary tax in 2007.

For example: The 2007 sale price was $910,000.
The basis was $350,000,including the cost of sale, thus our gain was $560,000.
The gross profit after the $500,000 exclusion was $60,000. The gross profit percentage calculates to be 6.6%.

We received a $250,000 down payment."

If you received a $250,000 down payment, has the home dropped in value by more than $250,000?

If not, why are you eating any of the loss in value?

Also, I assume arguendo that installment reporting was properly available in the year the sale closed.

Regards, JAFO


JAFO, Thank you for your concern. As wradicals said, "That's your call, but only if your primary reason is to get the cash earlier rather than later." And that is the situation. This has not finalized, and I am working very hard to avoid the scenario I described. However, it is worth $ to me to avoid the issues of foreclosure and regaining responsibility for the property. How much $ is it worth to me? not really known at this time. But, thanks to the real estate market here in California, the real value of the property has plummeted since the original deal was struck.

Again, thank you for your concern and warning. I do appreciate that.

Jay

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110917 of 121341
Subject: Re: Home sale selling price reduction issues Date: 8/19/2010 7:28 PM
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jayob: "JAFO, Thank you for your concern."

Your welcome.

"As wradicals said, "That's your call, but only if your primary reason is to get the cash earlier rather than later." And that is the situation."

Ok. You know your deal and your reasons and you certainly do not need to explain them to me or in detail on a public board.

910 - 250 = 660 Note amount.

Interest only, no principal payments per your ealier report.

60, less or 10% reduction of the Note amount.

Not a horrible haircut, in terms of selling a note; many note buyers would ask for a bigger discount.

"This has not finalized, and I am working very hard to avoid the scenario I described. However, it is worth $ to me to avoid the issues of foreclosure and regaining responsibility for the property."

Ok.

"How much $ is it worth to me? not really known at this time."

At least 60k per the above; perhaps even more? Seems expesnive to me, FWIW.

California has the one-action rule, non-judicial power of sale and as I understand it PM finacing is non-recourese, so the it would costs of non-judicial foreclosure sale, potential bankrupcty, holding costs (which depends upon estiate time to re-sell) and broker's commission.

Assuming that it would cost a 60% commission and sell for at least $800,000 that would be 46k commission that you save.

"But, thanks to the real estate market here in California, the real value of the property has plummeted since the original deal was struck.

Again, thank you for your concern and warning. I do appreciate that."


The concern that was also lurking is that you sold to a related party and the reduction is really more in the nature of a gift, especially if the buyer is not sharing any of the price loss related to the price depreciation.

Just my $0.02.

Regards, JAFO

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