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DW, who has been handing our RE investments -- or mishandling them -- wishes to save a certain property from foreclosure, and has located a buyer who will buy it at a fraction of its cost, with an agreement to sell it back (at a fractional -- but higher -- price than that) in six months (by which time she believes she will be better able to handle the mortgage payments). The main reason she wants to get it back is that the people who are in there now want to buy the property in a year or so; she'd really like to sell it to those people right now, but they can't pay now....

This sounds (to me) like an expensive way of getting a loan for six months (the expense of the loan is mainly the difference between the two fractional prices I alluded to).

But one strong motivation for her to do it this way is that she received a payout when we did this. And we really need the cash.

But now I'm thinking about taxes. Should I just record it as sold --at this fractional price -- and recapture all previous depreciation; this will probably generate a pretty big tax loss. And then, assuming we buy it back in six months, do I start depreciating it all over again, and also record a new (and fractional) cost basis? That would generate a huge taxable profit when we sell it, as we plan to do.

culcha
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But one strong motivation for her to do it this way is that she received a payout when we did this. And we really need the cash.

But now I'm thinking about taxes. Should I just record it as sold --at this fractional price -- and recapture all previous depreciation; this will probably generate a pretty big tax loss. And then, assuming we buy it back in six months, do I start depreciating it all over again, and also record a new (and fractional) cost basis? That would generate a huge taxable profit when we sell it, as we plan to do.


The way the tense keeps changing I can't figure out whether this is something you're contemplating or have already done. Hopefully it's the former because I wouldn't touch this arrangement with a barge pole without legal and tax advice up front. It's potentially dangerous territory when you engage in a transaction that isn't really what it looks like on the surface.

Phil
Rule Your Retirement Home Fool
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DW, who has been handing our RE investments -- or mishandling them -- wishes to save a certain property from foreclosure, and has located a buyer who will buy it at a fraction of its cost, with an agreement to sell it back (at a fractional -- but higher -- price than that) in six months (by which time she believes she will be better able to handle the mortgage payments). The main reason she wants to get it back is that the people who are in there now want to buy the property in a year or so; she'd really like to sell it to those people right now, but they can't pay now....

This sounds (to me) like an expensive way of getting a loan for six months (the expense of the loan is mainly the difference between the two fractional prices I alluded to).


Actually, it sounds like fraud to me.

She needs to read her mortgage documents. It is very likely that the mortgage becomes due and payable in full if she sells it. And it is very unlikely that the mortgage on the property can be kept in place at all, much less in her name, when she does not own the property.

If DW hasn't done this yet, she needs to STOP immediately, and consult a real estate attorney.

If she has already done this, she'd better get a really good real estate attorney, and maybe a criminal attorney, too.

AJ
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Why doesn't the potential current buyer just sell it to the potential future buyer and leave DW out of the picture for that portion of the transaction?
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culcha,

I hope this has not been done. It does not even begin to pass the smell test.

What is there to stop this person from selling the property once they buy it from you?

They could put it on the market at a reasonable price and sell it for a huge profit. What recourse would you have? Would you want to expose this transaction to the scrutiny of the court system?

I don't think so ...

Gene
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The way the tense keeps changing I can't figure out whether this is something you're contemplating or have already done.

Sorry about the tense changes .... This plan came to me rather suddenly from DW and I started out writing the post as a hypothetical, but we actually went through a lawyer and did this. But my real questions were about the tax ramifications, which are in the future.

I thought it was potentially dangerous too, but there are some positive features. We got the remainder of the mortgage paid off (although this wasn't much anyway). We saved the property from going into foreclosure. We got a cash payout. We appended a clause to the contract that gives us the option to buy the property back within six months. (DW has a plan -- as well as a back-up plan B -- to raise the money.) According to DW, this "option" talk entails that the buyer would be in violation of the contract if he were to sell the property without either (a) a release from the option, or (b) the passage of at least six months. (The word "option" doesn't sound that way to me, so she says she'll get the buyer to spell this out in writing to me.)

I usually do our taxes, but DW suggests that this might be a year to have the taxes professionally done. (Both the sale and the re-purchase of the property will be 2013 events.)

culcha
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If the existing mortgage was paid off with the sale proceeds, I think any possible fraud issues have been laid to rest. The only significant tax issue that I see would be a wash sale consideration if the property were bought back within 30 days. Otherwise, the sale completes the ownership history of the rental property and any suspended losses would be reported on this year's tax return. The future repurchase of the property, if it occurs, would start a new ownership period with a new depreciation schedule based on the new cost basis.

Ira
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This plan came to me rather suddenly from DW and I started out writing the post as a hypothetical, but we actually went through a lawyer and did this.

Well, it's good you used a lawyer.

I thought it was potentially dangerous too, but there are some positive features. We got the remainder of the mortgage paid off (although this wasn't much anyway). We saved the property from going into foreclosure.

Okay, from your original post, it wasn't clear that the mortgage got paid off. Since you paid off the mortgage, sounds like there wasn't any fraud.

But I guess I'm confused. If the mortgage "wasn't much anyway" - couldn't you have just refinanced the remaining amount, plus maybe some cash out if you wanted additional cash? If you had refinanced into a longer term mortgage, you should have been able to lower the payments to something that you could afford, based on the rent that was being paid? Seems like that would have cost a lot less, and not brought the tax issues into play.

We appended a clause to the contract that gives us the option to buy the property back within six months. (DW has a plan -- as well as a back-up plan B -- to raise the money.) According to DW, this "option" talk entails that the buyer would be in violation of the contract if he were to sell the property without either (a) a release from the option, or (b) the passage of at least six months. (The word "option" doesn't sound that way to me, so she says she'll get the buyer to spell this out in writing to me.)

If you haven't already, you probably need to have the option recorded with your county clerk/recorder. If the option isn't recorded, the current owner could sell the property without your knowledge and get a clear title because the title company can't find an unrecorded option. Then you would have to sue to either get the property back, or get compensation from the parties involved in selling the property. Even after you get the option recorded, you should be pretty diligent about watching the MLS and FSBO listings, and checking the land transfer property records to be sure that the current owner doesn't attempt to ignore your option and sell the property. That said, if he has a buyer lined up to close at 6 months and 1 day, you are out of luck, so you need to get your financing in place sooner rather than later.

AJ
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If you haven't already, you probably need to have the option recorded with your county clerk/recorder. If the option isn't recorded, the current owner could sell the property without your knowledge and get a clear title because the title company can't find an unrecorded option. Then you would have to sue to either get the property back, or get compensation from the parties involved in selling the property. Even after you get the option recorded, you should be pretty diligent about watching the MLS and FSBO listings, and checking the land transfer property records to be sure that the current owner doesn't attempt to ignore your option and sell the property. That said, if he has a buyer lined up to close at 6 months and 1 day, you are out of luck, so you need to get your financing in place sooner rather than later.

Thanks. We'll definitely be watching, and we'll be sure to line up the buy-back of the property ahead of time.

culcha
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Even after you get the option recorded, you should be pretty diligent about watching

We'll definitely be watching

I hope that you meant "The option has been/will be recorded, and then we'll definitely be watching."

Without having the option recorded, you are leaving yourself at a risk of having the property sold out from underneath you and having to bring an expensive lawsuit to get your interest recognized. Spending a few dollars to get the option recorded would be a lot cheaper than trying to prove your interest in the property in court.

AJ
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<<We'll definitely be watching>>

I hope that you meant "The option has been/will be recorded, and then we'll definitely be watching."

OK, Thanks. I'll double-check on the recording. And then be watchful.

culcha
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