Posted by JHyre in Ohio on July 22, 2002 at 07:09:28:
In re #1: If you purchase a note at a discount, the discount is usually treated as interest. The timing of that taxation varies, depending on the method of accounting, and whether the Original Issue Discount rules apply.
John Hyre
PS: Dave, I’ll get to your response on L/O taxation later on today. JMH
Tax Implications of Discounted Mortgages - Posted by mei122@ameritech.net
Posted by mei122@ameritech.net on July 19, 2002 at 19:18:09:
This question is regarding discounted mortgages on foreclosures. Wouldn’t the owner have to pay income taxes on the balance of a discounted mortgage in a short sale? If so, what can be done to make it easier to swallow by the owner?
Re: Tax Implications of Discounted Mortgages - Posted by Dave T
Posted by Dave T on July 21, 2002 at 20:44:12:
Your question needs a little clarification.
Are you asking what the tax implication is for the borrower when you buy his mortgage note from his lender at a discount?
Are you asking what the tax implication is for the borrower when his property is sold under a short sale arrangement?
If the question is number 1, then there is no tax implication for the borrower. The fact that the lender sells the mortgage note at a discount does not change the borrower’s remaining balance due on the note, and does not create a taxable event for the borrower.
If the question is number 2, then the answer is “It depends”. If the borrower is insolvent (you said foreclosure), then the borrower can get relief from the taxes due on forgiven debt assuming the lender even bothers to issue a 1099-C. If the borrower is not insolvent, a short sale is needed because the property is “upside down”, and the borrower does not have the resources to make up the difference, then the amount of the debt forgiven that exceeds the full market value of the property could be taxable as ordinary income. If the lender obtains a judgement for the difference between the sale proceeds and the mortgage payoff, then no debt is forgiven and a taxable event has not occurred.
In any event, I suggest that you advise the seller to seek his own tax advice from competent tax professionals. You do not want to be in the position of having the seller act on your advice and then later have that advice turn out to be wrong. The seller’s tax concerns are not the problem you are trying to solve.