Discussion:Loans and foreclosure
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Discussion Forum Index --> Tax Questions --> Loans and foreclosure
| 13 April 2006 | |
| Mortgagee had loans to a builder in which there were 8 lots. Builder completed one house, partially constructed another. Builder could not sell completed home because of contractor liens and unpaid taxes. Mortgagee started foreclosure proceedings. To make long story short builder signed porperties back over to lender. Lender paid back taxes etc, sold the completed, and the in-process homes, but not the lots. Allocated loans to basis in properties based on sales price and estimated (FMV) of properties sold. One sold at loss and the other at gain. Is this capital gain/loss or ordinary. Should gain/loss be recognized on the unsold lots? | |
| 13 April 2006 | |
| Is there any way your client is going to get money out of this foreclosure? If yes, you have to wait until it is all over. If no, he has a disposition. He exhanged everything for balance of debt plus payables. | |
| 13 April 2006 | |
| It is really a timing issue, recognizing gain on the FMV of the property when it was deeded back over what was paid out plus the monies loaned. Of course the deeded back happened in a prior year (03 or 04) not sure til talk to lawyer who is on vaca, and a sale reported in 2004 (even though when asked how foreclosure was going that nothing happened yet), and another sale occurred in 2005. The first at a loss, and the second at a gain. FMV of propperty when deeded back 310K, loan bais 195K, back taxes 60K. When do you recognize the gain? | |
| 14 April 2006 | |
| Absent some sort of agreement between builder and lender, I can't see gain, and I'm not sure where fair market value enters the equation. Builder handed over property in exchange for relief from debt. payables would increase basis and net out. In any event, if you are trying to separate the aggregate you need something from the lender allocating portions of the loan to specific parcels.
Otherwise I might treat the entire transaction in the same manner as a series of liquidation distributions. | |
| 14 April 2006 | |
| On the other hand, perhaps i am misreading the question. Are you representing the lender? If so, I don't think you have to separate the aggregate, and the liquidation treatment might be a good approach. Start reporting gain when you pass the break even point. | |
| 14 April 2006 | |
| Seems to me, if you were treating this as gain on repossession you would have had to recognize back in 2003 or 2004. The numbers are close enough to consider the original foreclosure a wash. If FMV on the individual pieces added up to 310, lender wouldn't have come anywhere near that trying to deal the whole. | |
| 27 April 2006 | |
| I filed extension for lender, and went on vacation!! Worked til 11:00 pm and flew by 7:00am on the 16th... won't do that again!! But anyway..Client is the lender... Found out he received deed in lieu of forclosure dated 12/12/03, but was not recorded until 09/24/04, when he sold the first parcel. Two parcels were sold seperatly, one in 04 and one in 05, and the remaining vacant lots will probably be sold together, but not certain. So far FMV @ repo = $310. Loan+ back taxes = $255, but need to get back taxes on the vacant lots so could be a wash or close to it. Do I report repo in 03 or 04? Do i report entire repo or report as parcels are sold? | |
| 27 April 2006 | |
| Also, could lender possibly deduct real estate taxes as other homes or land after repossession? | |
| 28 April 2006 | |
| Fair market value on foreclosure would be as at 12/12/03. The valuation should be inclusive of the unpaid real estate liability and the existence (which is not necessarily the amount of) the lien, and should be based not on the appraised values of the individual parcels but on the appraised value of the whole. How solid is your $310? How close to foreclosure date was the 2004 sale? (This has direct bearing on the original appraisal.) Has client at any point made a decision to hold any part for investment? Was the 2004 sale the one at gain or loss? A 2005 loss would cast doubt on a 2004 appraisal.
From my point of view client would have been nuts not to toss the whole thing into an LLC on foreclosure. Everything you've said so far indicates that he has competant legal advice and is not particularly communicative. Whether or not that is the case, you would want to treat expenses such as real estate taxes in a manner that would not create a disallowance of loss on sale. | |
| 28 April 2006 | |
| The 310 comes from the sale of the two properties (115 +75) and what the client thinks he will get for the lots (6@20). No appraisal was done. The 2004 sale occurred in September, 9 mos after deed in lieu, and after adding back taxes etc, was the house that sold for a loss - 8,236. The gain was in 2005 at 11,481. Are these capital or ordinary (business bad-debt)? Still waiting for the taxes on the lots, but they won't amount to as much as the taxes on the completed homes. Is there any consequenses on foregone interest on the loans? | |
| 28 April 2006 | |
| OK You have recognition in 2003. You have no way to compute gain if any. Your allocation produced a loss on a sale within 9 months so it has to be theoretically wrong. (And client will change his estimates of value when told of tax liability) I would be surprised if your client incurred no expense preserving the value of a house under construction that just sat for more than a year. If forgone interest was an amount included in the foreclosure proceeding, I would think 2003 income recognition would both apply and increase basis. | |
| 29 April 2006 | |
| My numbers included expenses he incurred preserving the value, hence the loss. Sweat equity goes a long way but does not increase basis. The loss includes taxes paid after repo, hence the loss.Foregone interest was not considered in my numbers, but do not have any papers from attorney. So, even though "foreclosure" did not take place, and borrower provided "deed in lieu of foreclosure", recognition would be in 2003? If so, is the loss in 04 business bad debt, fully deductible, or capital loss, subject to 3,000 limitation? If recognize interest in 2003, then loss beomes larger. | |
| 29 April 2006 | |
| I am totally confused on the events and numbers at this point, however since you are working backwards to come up with a value on foreclosure sweat equity matters quite a bit. It does not increase basis, but the value added is reflected in the sale price. That value wasn't present when foreclosure took place. | |
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