Discussion:"Subject to" Mortgage
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Discussion Forum Index --> Tax Questions --> "Subject to" Mortgage
| 20 June 2008 | |
| Tax client (residential remodeler) purchased real estate property in 2006 with a "Subject to" Mortgage. (ie., he took title and assumed mortgage payments, but was not liable for the debt because mortgage stayed in the seller's name.) Sold property in 2007.
Question: Are my client's payments on the mortgage deductible? Did a search via the magic yellow box to the left, but couldn't locate a clear answer. Thanks in advance | |
Death&Taxes (talk|edits) said: | 20 June 2008 |
| Did you try "wrap" or "wraps"? | |
| 20 June 2008 | |
| D&T,thanks for the reply. I've tried 'wraps', subsequent to your post, however, my understanding is that a wrap mortgage is a different animal (the title remains in sellers name) from a 'subject to' mortgage. | |
| 20 June 2008 | |
| Question: Are my client's payments on the mortgage deductible? | |
| 23 June 2008 | |
| Yes, see Reg. Sec. 1.163-1(b). Your clent has assumed the mortgage under subject to arrangement. Thus, he need not be named on the mortgage to be considered as being liable on the mortgage. | |
| 23 June 2008 | |
| Although the terms "subject to" and "assumed" are being used, I would venture a guess that the "buyer" of the property who took the property "sub 2" is not legally obligated to the mortgage primarily due to the fact that to do so these days is a very, very rare occurence. The "Due On Sale" pretty much did away with "assumable" mortgages. I think that came into being in the late 80's.
There used to be a true taking a property subject to a mortgage and, in fact, there is still a line on the HUD-1 form for it's application. However, in this context, I believe that "Subject to" is a bit of a misnomer. It is the name of a technique that has been and is still being used by real estate investors whereby they locate one who is looking to sell, usually one in a financially-distressed situation, and they agree to bring the mortgage current and make the mortgagor's payments while actually taking title to the property (subject to state law). All of this is done without the lender knowing what is going on. The buyer merely changes the address for the loan statements and makes the payments when due. As long as the lender gets its money, the matter isn't known or pursued. In this case, there is no legal obligation to make the payments. However, I would argue that there is a moral obligation to make the payments as agreed but I don't think morals enter in to this specific question. There have been cases where title was transferred, the property was rented by the "new owner", who collected rents and never paid a single penny as agreed. I think that is referred to as equity skimming and has Attorneys General throughout the country hot on the tails of these scammers. Given that scenario, would the answer be the same? As there is no legal obligation on the part of the buyer, to make the mortgage payments? | |
| 23 June 2008 | |
| yes
not quite the same, but you can do a search on 'beneficial owner' or 'equitable owner' for additional confirmation of the theory | |
| 23 June 2008 | |
| Although it is true that an owner in a subject to mortgage situation has no personal liability, he will lose the property if he decides to default on the existing indebtedness. Thus, Reg. Sec. 1.163-1(b) still applies.
Subject to financing is very common in today's economy. For example, if I am the successful bidder at a foreclosure auction on a second trust deed, I basically own the property subject to the existing first trust deed -- even if my name does not appear on the first trust deed. The lender on the first has every right to call the loan if I notify them that I will be taking over the payments; however, this is not likely to happen. | |
Southparkcpa (talk|edits) said: | 23 June 2008 |
| Careful here... you need be certain that the 1st mortgage holder is aware of the sale and has signed off. If the deal was done without the OK of the 1st mortgage holder (can't imagine how), your client may not be "at risk" unless the seller filed his lien. I am sure it was done properly but it is worth checking. | |
| 24 June 2008 | |
| No need to notify the lender at all. Taking a property subject to existing debt is the same as a formal assumption (for tax purposes). | |
Southparkcpa (talk|edits) said: | 25 June 2008 |
| of course, in the real world you are 100 percent correct. I have been in this business a LONG time and have seen quite a few things. My only point was that I would not be surprised if the Title did NOT transfer and this was a "hand shake " deal. Sometimes, what the client tells us and what actually happened can be 2 different things. So taking it subject to a mortgage, without the proper legal paperwork handled, (and I have seen this) can have negative consequences. | |
| 25 June 2008 | |
| Kevin, my mistake--sorry for repeating the question as if you had not answered it. I didn't realize your "yes" answer was directed to my original query, but rather thought it to mean you were agreeing with my clarification immediately above it. Very much appreciate your help. | |
