assignment vs. short sale - income ramifications? - Posted by TRandle

Real Estate Investing
#1

Posted by David Butler on January 08, 2001 at 15:25:06:

Hello T,

Based on my understanding of the information you have just provided, it would appear that you are purchasing the property from the Payor for $5,000 plus the amount owed on the second loan and the curing amount. In my estimation, the Payor will have a taxable gain on the differences, by way of the debt relief over and above his tax basis in the property. However, if it is his personal residence, and he has lived in the home for at least two of the past five years, this amount appears to fall under the exclusionary rule as far as his tax liability.

With a normal purchase, the $5,000 cash you are giving him is just purchase money… and here too, that appears to be all it is, so a 1099 is not necessarily in order. However, the debt relief portion you are using can be looked at in two different ways.

I suggest you speak to your accountant to see whether you need to 1099 him on that, or whether his tax man simply needs to account for it in doing the offsets involved in the transaction in preparing the Payor’s next tax return…

Hope that helps,

David P. Butler

#2

assignment vs. short sale - income ramifications? - Posted by TRandle

Posted by TRandle on January 07, 2001 at 12:33:15:

If I buy a 2nd Trust Deed for a discounted price through an assignment, will the borrower typically receive a 1099 for the discount, similar to a short sale? What are the differences, if any, between a short sale and a discounted assignment? Thanks in advance for all responses.

#3

Re: assignment vs. short sale - Posted by David Butler

Posted by David Butler on January 07, 2001 at 18:30:35:

Hello T,

Nope… a short sale is an agreement whereby a lender relieves the borrower (the principals to the mortgage contract), from all or a portion of the borrower’s remaining debt obligation due under the contract - whereas purchasing a note at discount from the lender (seller) is an agreement between you and the seller.
All you did in that instances was purchase the lender’s right to the remaining debt obligation due under the mortgage obligation. Outside of the Payor making his payment to somebody else, how does this affect the borrower/Payor? What remunerative benefit has he received??? Any you can think of?

Hope this helps, and be sure to have a good look at the post I made to SBowe down below with regard to buying 2nds, at: http://www.creonline.com/cashflow/wwwboard3/messages/8648.html

You might also find it prudent to have a good look at our FREE report, NOTE GRADING/PRICING GUIDELINES, at:
http://notenetwork.com/at.cgi?a=118510&e=Reports/Note.Pricing.Guidelines.html

so you’ll have a better feel for evaluating the notes you look at.

David P. Butler

#4

Re: assignment vs. short sale - Posted by TRandle

Posted by TRandle on January 07, 2001 at 19:32:59:

David,
Thanks. That’s the answer for which I was hoping. In a normal situation, I agree that I couldn’t determine any benefit to the borrower. In this particular one (assuming all goes close to plan), the borrower is receiving remuneration (cash at closing).

I tried to buy the 2nd (44k with 4k arrearage) for $1,500. They didn’t bite, but I had given the holder of the 2nd the info necessary to cure the 1st, which was foreclosing in about 5 days at that time. The 2nd had never been notified. So, now the 2nd has cured the 1st and I’m trying to buy the 2nd for 20k plus the cure on the 1st. If successful, I will give the seller 5k at closing and be in for about 70% or so. I just wanted to make sure there were no other potential downsides that I needed to disclose to the seller. Great news…