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I purchased a property at home owner association foreclosure…

Customer Question
I purchased a property...

I purchased a property at home owner association foreclosure auction subject to existing mortgage.
I paid 20K cash and there is an outstanding mortgage of 80K.What is my basis for depreciation if I keep this as a rental property.What is the basis if I flip this property and sell it at 120K. What is the basis for capital gain tax?Thanks

Submitted: 2 months ago.Category: Tax
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12/17/2017
Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago
Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
Satisfied Customers: 1,408
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Welcome to JustAnswer!

My name is***** will be able to assist you today.

In most situations, the basis of an asset is its cost to you. The basis would not change if you flipped the property. If you sell the property within a year after the title has been transferred to you, then your gains would be short term capital gains.

___

The basis of the home is the amount you pay for it in cash, debt obligations that you owe. Cost includes sales tax and other expenses connected with the purchase.

Are you responsible for paying the mortgage? If not, your basis for capital gain purposes is $20K regardless of whether you rent the home or sell it immediately.

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

The real estate basis of a property is the sales price plus certain fees and other expenses that you may have paid to obtain the home, for example:

  • Abstract of title fees
  • Charges for installing utility services
  • Legal fees, like:
    • Title search
    • Preparation of the sales contract
    • Preparation of the deed
  • Recording fees
  • Surveys
  • Transfer taxes
  • Owner’s title insurance
  • Closing costs
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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

If you have any additional or if I did not answer your question completely please let me know!

My goal is to ensure you receive 100% satisfaction.

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Customer reply replied 2 months ago
Thank you for reply.
I understand that the nature of a debt being recourse or non-recourse is important. This is a non-recourse debt for previous borrower and I did not sign any mortgage document. However, my economic benefit is tightly linked to this mortgage. It is a superior lien and if not paid they will foreclose and I lose my title. So, even though I am a 3rd party in this picture I can still write the monthly checks just to protect myself.Here is more details about Tufts case law
https://www.thetaxadviser.com/issues/2010/jun/sullivan-jun10.html
Customer reply replied 2 months ago
I can call tomorrow as it is easier if you want.
Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

No need for a call, the option comes up automatically

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

At this point you don't have title to the home. The expenses that you have paid would count towards your basis in the event you did foreclose and gain title of the property

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

The loan may be a non recourse debt depending on the state, but the bank won't release the title until the debt is paid or the property is auctioned off.

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Customer reply replied 2 months ago
I agree that I do not have a clean title. As mentioned I bought it at HOA sale subject to bank lien.
You are right that bank will not release the lien without full payoff.
Now, my investment at risk depends on this payoff. Or I service it on behalf of previous owner and pay the monthly costs to
the bank.
Will my basis then be the purchase price + existing mortgage. Also mind in Texas regular mortgages are non-recourse.
Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

Your basis would still by your out of pocket purchase price of $20K plus other fees that I mentioned above.

If in fact you were able to sell the home, the proceeds would have to first pay off the loan.

The loan being non recourse merely means in the event that the owner defaults the issuer of the debt (the bank) can seize the property, but cannot seek out the borrower for any further compensation.

The bank will still want the $180K loan satisfied before they give up the title. If you made payments, on the home, you would only serve to help the current owner of the home.

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

The loan can not be automatically turned over to you. Even if you made payments on the loan the loan agreement as drawn up currently is between the current owner and the bank.

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

HOA liens are usually junior to a first mortgage. This is because the HOA lien is either:

  • recorded after the first mortgage, or
  • the CC&Rs or state law makes the HOA lien junior to any first mortgage (even if the HOA lien is actually senior).

This means that the first-mortgage lien will stay on the property following the HOA foreclosure and the purchaser at the foreclosure sale will take title subject to the lien of the first mortgage holder.

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

You could speak to the current home owner and ask if they are interested in working out a short sale or a deed in lieu.

Short of those options, you will have to work with the bank, who would have to foreclose on the homeowner.

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Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

Lien Priority in Texas

Lien priority determines what happens to other liens, mortgages, and lines of credit if your HOA or COA lien is foreclosed.

A COA lien for unpaid assessments has priority over all other liens except:

  • a lien for real property taxes (and other governmental assessments)
  • a lien or encumbrance recorded before the declaration is recorded
  • a lien for the construction of improvements or an assignment of the right to insurance proceeds recorded before the date the assessment becomes delinquent (unless the declaration provides otherwise), and
  • a first mortgage or deed of trust recorded before the date on which the assessment becomes delinquent (Tex. Prop. Code Ann. § 82.113(b)).
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Customer reply replied 2 months ago
Thank you and I agree with all you said. I have been doing this for over 10 years.
I started all these discussion to get to an actual situation. I am not sure if I have to pay more and please let me know.
I bought a HOA foreclosed property that had 80K mortgage for 20K. But the value was 150K.
Later, bank foreclosed on this property and I lost my title and 20K. Do you still argue that my basis for loss is 20K? If yes then what about the lost equity = 150-80-20= 50K. Based on above discussion if I sold it before bank foreclosure my profit would have been 50 then should't the loss basis be the same?
Tax Professional: Chad EA, CFP ®, Enrolled Agent replied 2 months ago

Your basis can't be more then what you actually spend out of pocket or debt taken out in your name. Therefore, your out of pocket expense from what you have stated is $20K

___

The mortgage is not your at risk amount because the mortgage was not your responsibility. I understand the value of the home and the mortgage, but if the mortgage isn't your personal responsibility then it doesn't count as your debt. The equity loss in the property, if any, would go to the person or business who agreed to the mortgage, if the home is actually sold.

__

The mortgage holder will receive a 1099 C for the cancellation of debt. If the mortgage was $80K then the bank is essentially forgiving that loan and the forgiveness of the loan could be taxable to the mortgage holder. The bank will attempt to sell the home to reduce the amount they have to forgive to the borrower

__

The value of the home only comes into play when and if there is a sale of the home. Then at that time, if the home is sold for more then enough to settle the first lien, the second lien position would be paid and finally the mortgage holder would receive any amount after the 1st and 2nd lien position have been satisfied.

____

Let me know your thoughts please!

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