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Hi, I had a VA loan which I allowed to be assumed by a buyer

approximately 25 years ago....
Hi, I had a VA loan which I allowed to be assumed by a buyer approximately 25 years ago. That buyer defaulted on the loan and as a result I lost my full VA home buying benefit. I still have a VA Certificate of Eligibility (COE) but to reinstate the full house buying benefit, I have to pay off $25,000 the VA got stuck with because the guy who assumed my loan defaulted on it. My question is this: If I pay off the $25,000 to get back my benefit, would it be tax deductible since the defaulted mortgage had nothing to do me?

Thanks,

GLB
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Answered in 1 hour by:
10/1/2011
Jax Tax
Jax Tax, Tax Attorney
Category: Tax
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Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Jax Tax : Assuming you properly reported the sale by including the assumption of debt as sales proceeds against your basis, you may.
Jax Tax : You deduction may be limited.
Jax Tax : The Max amount you could take is the lower of the taxable capital gain reported or $25,000.
Jax Tax : If you had a profit but qualified under sec 121 not to be taxed, you cannot take any deduction because you got the profit tax free.
Jax Tax : If you had no profit, you cannot take the loss if it was a personal residence because losses on personal residences is not allowed.
Customer:

I no longer have the tax records from the sale of that home. I do remember the transaction was with a realtor of the new home where I agreed to purchase the new home if the realtor would take the trade of my old home for the new home. The realtor agreed and then sold the home to the new buyer and got my consent to take over my VA loan. I don't remember if there were capital gains or not, it was a unique transaction. Was there a law on capital gains for personal residence 25 years ago?

Jax Tax : That is the answer to your question. You have find the records some how. Federal law requires you keep records so long as needed in respect to claiming a loss or deduction. If you can claim it, it is a sch D long term capital loss.
Jax Tax : Maybe the preparer has it. You can use form 4506t to request a copy from the IRS but there is only a small chance they have it.
Jax Tax : Yes, there was tax then.
Customer:

It seems odd that my having to pay for someone else's bad debt in order to get my benefit back is connected to the sell of the house. The house was actually sold to the realtor and had nothing to do with the realtor's transaction with the new buyer i.e. I did not sell the house to the buyer, the realtor sold it after I traded it. I just allowed the buyer to assume my VA loan. Can you think of any other possible recommendations of pursing a remedy?

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I see. Of you traded it, you still recognized gain in the value of the home. For example, if you purchase it for a $1 and when traded it was worth $20, you would have received the benefit of the $20 current fair market value. You could have fettered the gain under section 1031 transferring the original basis to the new home decreeing the capital gain until the new home was sold. In that case, you would increase your basis in the new home by $25k if you paid the debt. Again, this would be on the return 25 years ago. You have to know how and what was reported. Reason is that if you only had a gain of $10k and this $25k of unpaid loan was factored, you would have had a loss of $15k. Since it was your personal residence, you would not have been able to claim the loss. That is why you cannot now claim the loss tied to your personal residence unless you had taxable gain on the sale.
If you elected sec 1031, current basis increase would be the way you account for the $25k payment which would differ the benefit until your current home is sold. Anyway you slice it, you have to have that return.
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I know this is not what you wanted to hear, but you have to figure out what was on that return.
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