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I’ve been buying foreclosure houses subject to the existing mortgage for several years. I recently read something in another RE expert’s material that trying to claim the interest paid on a subject to property would raise an IRS audit issue. Here is the quote from their materials:
“You are not entitled to take the mortgage interest deduction for mortgages you take ‘under and subject to’ due to the IRS ‘at risk’ rules. You can also trigger an audit if you try to take the deduction because the morgage company issued 1098 form at the end of each year will not have your tax ID numbers on it. If you report payment of the interest the IRS may inquire as to why no 1098 was issued to you. This can lead down the road to an audit. This is not an issue if you use the ‘under and subject to’ method for short term financing only”
This is the first time I’ve ever heard this, and Jack and others talk about buying subject to all the time.
George,
Don’t believe everything you read from “another RE ‘experts” materials
Not all RE”experts” are created equal as I’m sure you know.
I’ve been buying subject to for more than 12 years and always claimed the deduction with no problems.
However…for the past 8 years I’ve been buying subject to a little differently. Instead of me just getting the deed and leaving the loan in the seller’s name, I actually structure it as seller financing so the seller gets a non-recourse note and a deed of trust. The note says that I make payments that match and mirror the underlying loan.
When you do it that way there is absolutely no question about who gets the interest deduction.
It is rightfully yours – take the deductation
Jackie
P.S. Speaking of so called – self-proclaimed REexperts — I read an article by some guy named Jeff Adams today who was telling people to find sellers who will write a contract for more than their sales price so he can pull cash out at closing when he gets financing.
That’s an easy way for someone to get free room and board at their local prison for several years — ie – loan fraud.
Another lady was selling condo conversions in the Mississippi Gulf Coast and telling buyers that they get 50% of their purchase price back from the IRS because it qualifies as a Go Zone property. — What she was not telling her buyers is that Go Zone properties have to be new construction and it’s a 50% depreciation – not a direct check. Not sure if she was intentionally misleading people or just stupid or both.
It AMAZES me the junk that is floating around out there!!!!
What’s even more amazing is that people pay thousands of dolllars to learn from some of these people.
I like your idea of structuring a loan as seller financing so the seller gets a non-recourse note and a deed of trust with the note saying that the payments that match and mirror the underlying loan.
Help me understand the mechanics. The existing loan with the seller’s name on it stays as is. How do you ensure that the seller is going to make the payments on the underlying mortgage? Are you making the payments directly?
Give me a few more details.
I make the payments directly to the lender — and it states that in the note
I understand you need to report interest paid on deb taken subject to under “Other interest” instead of “Mortgage interest paid to banks” to avoid triggering an audit. Apparently, the IRS matches the amounts reported on the 1098 to what you report on your return. If the SSN differ, they will find an inconsistency.
Pedro
Quote:Posted By Jackie on 07/21/2008 8:41 PMHowever…for the past 8 years I’ve been buying subject to a little differently. Instead of me just getting the deed and leaving the loan in the seller’s name, I actually structure it as seller financing so the seller gets a non-recourse note and a deed of trust. The note says that I make payments that match and mirror the underlying loan.
Can you pls expand on how to structure this? By “match and mirror”, do you actually make payments to the seller and then trust them to make the payments to the bank?
I’m making a sub2 offer tonight:
Value: $450k+
Seller owes $280K and is 2 payments down.
I want make the 2 payments in cash to the lender.
Takeover the $280k note.
Give the seller $20k in a note payable $200/month for 100 months.I’m open for deal structure suggestions.
I make all payments directly to the mortgage company.
match and mirror means that my note to the seller matches the underlying loan in terms remaining, interest rates, etc.
Offer to give her debt relief ONLY!
You’ll be surprised how many people will say yes!
If that does not fly, then you can offer to give her “some” additional payment in for form of a note but I would not make the payments start for at least a year or two. Or a balloon payment 5 years from now.
If she’s 2 payments down, the main thing she wants is debt relief.
Don’t think that you always have to offer money for equity. Many sellers just want out.
Jackie
Jackie wrote, “match and mirror means that my note to the seller matches the underlying loan in terms remaining, interest rates, etc. ”
I get that part… but does this mean you actually write the seller a check for the monthly payment and have them write one for the same amount to the lender? I doubt you’d give up that control … so I’m trying to figure out the mechanics of this “match and mirror”. Thanks!
You write the mortgage check directly to the mortgage company for the same monthly payment that the seller was making before you bought the house
You should not send the check to the seller – even if it is made out to the lender. It could get lost in the mail. They could lose it.
You want to take control and make sure that payment gets made on time.
Jackie
Jackie,
In my other post about a subject to deal I indicated using a land trust where the owner sets up the trust and makes me the trustee and owner is beneficiary.. owner then deeds title to the trust (same as estate palanning). Owner then assigns his interest in the Trust to me (not recorded, is similar to transfer of stock in a corp.) I am now beneficiary and trustee (me) makes payments to the lender.
You said “However…for the past 8 years I’ve been buying subject to a little differently. Instead of me just getting the deed and leaving the loan in the seller’s name, I actually structure it as seller financing so the seller gets a non-recourse note and a deed of trust. The note says that I make payments that match and mirror the underlying loan. ”
So are you not using a Trust? Are you using the forms that were on the other site i.e deed of trust, wrap around all-inclusive promissory note, special warranty deed, affadavit, etc.
Patrick,
I’m still using a trust but I don’t jump through all the hoops of having the seller create it, assign beneficial interest, etc.
When I buy – with seller financing taht wraps the underlying loan- my contract says that I will take title into a Trust. So I creat the trust, decide trustee and beneficiary and that means that none of that complicated stuff even has to be discussed with the seller.
When you start talking Trusts with a seller – even a motivated on – they get totally confused and that can cause suspicion.
IMHO
Jackie
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