Tax Question on $ Used to Reinstate Sellers 1st TD - Posted by Gary (CA)

Posted by JPiper on January 21, 2001 at 18:12:35:

I don’t think the time of title transfer has anything to do with it. Rather I think the rule has to do with when the proper is put into “use”. See my post above.

By the way, I received your prior post in my email. I doubt your post was removed because of content. I note that my post to you was also removed. Rather, I think it might have been inadvertently removed when they removed some of the other posts that DO violate policy. My guess is that our posts were removed in error. They don’t remove posts because of diverging opionions.


Tax Question on $ Used to Reinstate Sellers 1st TD - Posted by Gary (CA)

Posted by Gary (CA) on January 20, 2001 at 23:07:11:

On my first deal last year, it required me to reinstate the seller’s first trust deed to the tune of $22,000. Most of this represents the interest of the delinquent monthly mortgage payments. The seller deeded me the property ‘subject to’ the 1st TD. Am I entitled to the interest tax deduction that’s a large portion of the $22k or do I reduce the profit I received when I flipped the property by $22k?

Gary (CA)

Tax Question on $ Used to Reinstate Sellers 1st TD - Posted by Bud Branstetter

Posted by Bud Branstetter on January 21, 2001 at 11:07:22:


I am going to disagree with you on this one since it is one of those gray area. A conservative tax advisor would agree with your point. The agressive advisor would comment as below that you can. The delineating point is that you must take title before you pay the interest. As far has I know there has not been a ruling on this. On the question of property taxes there has been a ruling that you can only deduct taxes for the time you owned it. So that part of the payment for taxes would have to be added to the basis. If your tax man knows of a ruling on interest please let me know.

Re: Tax Question - Posted by JPiper

Posted by JPiper on January 21, 2001 at 08:38:10:


The answer is “no”, you do not deduct the interest. Instead, you would add the interest and other expenses to your cost basis. If you then flipped the property you would subtract your cost basis from the sales proceeds to determine your taxable income.

If you did not flip, but instead rented the property to a tenant, then you would depreciate your cost basis less land value. The back interest is not an “expense”.


Re: Tax Question - Posted by JPiper

Posted by JPiper on January 21, 2001 at 18:07:26:


If the definition of aggressive means that it?s not correct, but that you might not get caught unless you?re audited, I would agree with that. As a personal opinion though (I?m not a tax expert), I don?t think this is even a particularly gray area.

This is an area that I have had lengthy conversations with my CPA several years ago. Now admittedly I?m on the conservative side of things most of the time. But in this case I was arguing for the interest write off rather than capitalizing the interest. I?m told first that one issue has to do with putting the property into ?use??.meaning renting it out let?s say. Prior to that event I?m told that interest is properly capitalized. The thing here however is that if you bought the property in January, paid the interest in January, rented the property in April, the IRS would be unlikely to know this when you reported taxes the subsequent year. On the other hand if you bought the property in September, paid interest in September and thereafter, and rented the property in January, I could see this being caught easily. As an aside, in the construction business interest is always capitalized prior to the property being placed in use.

Then there?s the substance over form argument. It might go something like this: when you bought the property and took over the note it came with interest that you knew about, and therefore paying the interest is actually tantamount to a higher purchase price.

If the property though were was later flipped and the seller is a dealer then it all comes out in the wash anyway, whether you wrote the interest off and took a higher profit, or whether you capitalized the interest and therefore took a lower profit upon sale.

Now, all this said, I don?t know if there?s been a ?case? involving these exact circumstances. But my guess is that there are numerous references to the ?use? aspect of this, and the idea of substance over form as it pertains to the purchase of a property with a defaulted note would seem quite clear to me. I would ask my CPA for some of these but this time of the year his time is short.

I believe that the proper treatment of interest in the scenario mentioned is to capitalize it. Now whether you would get caught handling it differently I can?t say. But I can think of no arguments supporting this so-called ?aggressive? treatment.


Re: Tax Question - Posted by M Garick

Posted by M Garick on January 21, 2001 at 15:46:23:

My experiences have mirrored the post that Bud made…conservative=cost basis …agressive=deduct…I think, under the scope of the gov, the time of title transfer would rule the day.

While I echo the accolades that others have for Jim in Ed Garcia’s thread today, I do still find it uncomfortable and opressive when posts of differing opinions are deleated for arbitrary reasons unrelated to the posted editorial policies of this fine news group. This was the case with two of my post responses to this thread.