Posted by Todd Foster on February 20, 2004 at 20:01:24:
Thanks for the reply. I agree with your assessment. Unfortunately, no one I talk to seems to think it’s a good idea. Though the buyer’s attorney has written the P&S, the terms “mortgage fraud” and “tax avoidance” continue to be impediments for my attorney and other “advisors”.
I’m still looking for someone to explain a completely legitimate structuring for this kind of deal.
Thanks again.
Seller finance, forgive loan, capital gains, law? - Posted by Todd Foster
Posted by Todd Foster on February 19, 2004 at 21:03:54:
I’m selling my first investment property (@ $130k) and fairly new to the subtleties of the game. An experienced investor offered to give me my asking price of $130k.
The catch is he wants to write it up for $145k with me holding a $15k second mortgage. I’m supposed to forgive the second and walk away.
The idea is for him to put limited, if any, cash down and me not to incur capital gains money I don’t receive.
My attorney suggests this is a tax avoidance scheme. He is not experienced in the art of creative real estate, and I’m having trouble finding out how to work this or if it is legit. Can anyone help? Thank you.
Re: can you say fraud? - Posted by jewood
Posted by jewood on February 22, 2004 at 23:57:03:
Todd,
Can you say phelony mortgage fraud with possible imprisonment over a year? You have answered your question yourself as far as this deal being legal. It would not be legal if done how you stated it, although technically it may look legal and may not arouse suspicion (unless the buyer’s lender does some due diligence on the second.) If your intent is to avoid paying taxes or desceive a lender, then you are comitting a crime. Plain and simple. And since you stated his intent is to show the lender that he is paying a down payment, which he actually does not intend to do since you have an agreement with him to walk away from the second, this is fraud. If you want to make this legal, you cannot intend to deceive the lender to his detriment and even if the lender’s investment is very secure with the loan to value ratio of this deal, the point of the down payment is to insure that the buyer has a vested interest in this deal and will not walk away, thus you would be helping the buyer lie about that particular point. Will you get caught? Who knows. Maybe 99 times out of 100 you get away with it, but what if your buyer has done this 99 times already. What if this is his 100th? Do you want to risk a fraud indictment? What about conspiracy? Just something to think about.
Now, if you want to make this legal, try taking $120k down, with a second for $20k. If he cashes you out, you get $10k less up front, and $10k extra on the end. If he keeps the note in place, you get a cash flow that you can either keep, or sell to an investor at a discount. Even if you sell at 50%, you still get your asking price, just delayed. And, you stay within the boundaries of the law.
Good luck and good investing,
Jewood
Could be taxable income for buyer - Posted by Tom Bazley, CPA
Posted by Tom Bazley, CPA on February 20, 2004 at 10:35:12:
It appears that this case would create taxable income to the debtor. In Porten vs. Commissioner, 65 T.C.M., 1994, the court held that the occurence of a condition subsequent that allowed a debtor to be forgiven of a debt created taxable income to the debtor of the amount forgiven. I’ll let the attorneys handle the legalities here, but it appears that you’re writing the deal up for $145K could (again, I’ll let the attorneys handle that) be seen as a condition subsequent. Meaing your buyer would have taxable income of $15K to report.
Re: can you say fraud? - Posted by Obie
Posted by Obie on September 11, 2006 at 13:57:31:
Its felony not phelony.
And its not fraud if you disclose everything to the lender.
Re: can you say fraud? - Posted by Todd Foster
Posted by Todd Foster on February 23, 2004 at 08:15:18:
Jewood,
Thanks for the reply. This is exactly what I was looking for. The most bizarre part of this process is that the lender’s attorney is the one who drafted the P&S. My naivete had a hard time believing they would set me or their client up for mortgage fraud.
Live and learn. I am going to counter with your suggestion. Thanks!