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Subject-to transactions, are you writing off the mortgage interest?

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Dan Inc

Real Estate Investor from Charlotte, North Carolina

Feb 03 '12, 02:21 PM


Deed is your name, mortgage is in previous owners name, you've been paying the mortgage, do you write off the interest? My accountant says I can't...



Bryan Hancock

Real Estate Investor from Round Rock, Texas

Feb 03 '12, 02:28 PM


Why? You own the property.

Who is on the hook to pay the mortgage?



Medium_inner10_logo__updated_Bryan Hancock, Inner 10 Capital
E-Mail: [email protected]
Telephone: 1-800-577-0401
Website: http://www.inner10capital.com/invest/
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Bryan Hancock

Real Estate Investor from Round Rock, Texas

Feb 03 '12, 02:31 PM
1 vote


What is your exit strategy? Did you sell on a land contract or some such? Are you using this as a rental?

Here is a good resource for you from Bill Bronchick:

Tax Issues On A Subject-To Deal

Check the first result.



Medium_inner10_logo__updated_Bryan Hancock, Inner 10 Capital
E-Mail: [email protected]
Telephone: 1-800-577-0401
Website: http://www.inner10capital.com/invest/
Our Recent Austin Business Journal Article - http://tinyurl.com/Inner10Capital


Ed O.

Real Estate Investor from

Feb 03 '12, 04:37 PM


Time for a new accountant. There's some pretty sharp accountants on the board here.




Bryan Hancock

Real Estate Investor from Round Rock, Texas

Feb 03 '12, 04:38 PM


My suspicion is that there is more to the story. I think you really have to know the exit strategy and not just how the property was purchased.



Medium_inner10_logo__updated_Bryan Hancock, Inner 10 Capital
E-Mail: [email protected]
Telephone: 1-800-577-0401
Website: http://www.inner10capital.com/invest/
Our Recent Austin Business Journal Article - http://tinyurl.com/Inner10Capital


Ed O.

Real Estate Investor from

Feb 03 '12, 05:50 PM


"the basic rule of the interest deduction is that the person who has an ownership interest in the property, uses it as his principal residence, and actually makes the interest payments is the one who is entitled to the deduction"

Holding & paying the note on the property covers 2 of the 3 requirements. I'd guess it could be considered "other interest" when it comes to taxes. I'm curious to see what a tax pro might say.




Dan Inc

Real Estate Investor from Charlotte, North Carolina

Feb 03 '12, 06:46 PM


Ok allow me to start over ;)

I received the deed to a ****ty property in the hood for free. It was 3 months behind on the mortgage. I accepted the deed, got a power of attorney, and caught up the mortgage. I did some minor renovations to make the property renovated, and I've been renting it out for the last 3 years. I don't plan to sell it since it cash flows and the balance of the mortgage is about what it's worth. I will probably rent it for another 10 years or until the original seller bitches that a mortgage is still on his credit.



Bryan Hancock

Real Estate Investor from Round Rock, Texas

Feb 03 '12, 06:50 PM


In that case you should be able to take the deduction. Why is your accountant claiming you can't?



Medium_inner10_logo__updated_Bryan Hancock, Inner 10 Capital
E-Mail: [email protected]
Telephone: 1-800-577-0401
Website: http://www.inner10capital.com/invest/
Our Recent Austin Business Journal Article - http://tinyurl.com/Inner10Capital


Dan Inc

Real Estate Investor from Charlotte, North Carolina

Feb 03 '12, 07:33 PM


My accountant says she had just tried to do this, and the IRS came back and wouldn't allow it, I'd have to get more specifics. She did say that you must be the one responsible for the debt. I argued that I am responsible because it is a lien on my home, but she said that it must actually be in my name.



Bryan Hancock

Real Estate Investor from Round Rock, Texas

Feb 03 '12, 07:52 PM


If you are the one at risk for the debt it should be deductible. If you find anything from your accountant to the contrary please let us know.

I think the right answer is that you need to find a new accountant.



Medium_inner10_logo__updated_Bryan Hancock, Inner 10 Capital
E-Mail: [email protected]
Telephone: 1-800-577-0401
Website: http://www.inner10capital.com/invest/
Our Recent Austin Business Journal Article - http://tinyurl.com/Inner10Capital


Dan Inc

Real Estate Investor from Charlotte, North Carolina

Feb 03 '12, 07:57 PM


Not many accountants are going to know how to take an interest deduction on a subject-to deal. Most regular human beings don't know what a subject-to transaction is. To say to get a new accountant is unfair. To be realistic I should probably have to expect to research this on my own and provide the information to my accountant.



Bryan Hancock

Real Estate Investor from Round Rock, Texas

Feb 03 '12, 07:59 PM


I think it is perfectly fair. The accountant should say they don't know if they don't know. You may point them here:

Aggressive Tax Avoidance For Real Estate Investors

I don't agree with everything written in this book, but most of the exotic real estate strategies are covered with associated court case citations. I have an old copy I can use to look things up. I would be shocked if you can't deduct the interest. That would certainly be news to me.

I think your accountant is wrong.



Medium_inner10_logo__updated_Bryan Hancock, Inner 10 Capital
E-Mail: [email protected]
Telephone: 1-800-577-0401
Website: http://www.inner10capital.com/invest/
Our Recent Austin Business Journal Article - http://tinyurl.com/Inner10Capital


Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 03 '12, 08:19 PM
2 votes


Dan,

You are allowed to deduct the interest on any property in which you have a financial interest. That includes being listed on the deed. If the IRS questions simply show them a copy of the deed and they will not argue. Since you stand to lose if the property is foreclosed on.

The loan itself does not have to be in your name.

-Steven the Tax Guy
Your guide to IRS laws, rules and regulations.



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Bill Walston

Real Estate Investor from Northeast TN, Tennessee

Feb 03 '12, 08:46 PM


@Dan Inc, I agree 100% with @Steven Hamilton II...Sub-2 buyers have been deducting the mortgage interest paid for years.

Mortgage interest is such a common deduction for a rental property or personal residence that I'm surprised that it would even be an issue for the Service unless it appears excessive, is reported in some strange manner or the return was under audit. You may want to question your accountant as to his/her experience with real estate investors. He/she doesn't appear to be very familiar with Sub-2 transactions.



Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 03 '12, 08:54 PM
1 vote


@Bill What happens is the Form 1098 submitted to the IRS will not have his name on it. So when the IRS's computer is matching the information it will generate a mismatch and send him a letter telling him to prove the interest deduction or pay. Spouses that are splitting, the who are claiming the interest if they are not the primary get those letters all of the time He can show his payment history as well as the deed and it will go away.

As I said and @Bill Walston agreed with in another thread.

"It may be time to find another accountant."

-Steven the Tax Guy.



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Jerry Calhoun

Real Estate Investor from Spring Hill, Florida

Feb 04 '12, 09:33 AM


Originally posted by Steven Hamilton II:
@Bill What happens is the Form 1098 submitted to the IRS will not have his name on it. So when the IRS's computer is matching the information it will generate a mismatch and send him a letter telling him to prove the interest deduction or pay. Spouses that are splitting, the who are claiming the interest if they are not the primary get those letters all of the time He can show his payment history as well as the deed and it will go away.

As I said and Bill Walston agreed with in another thread.

"It may be time to find another accountant."

-Steven the Tax Guy.

What happens if both buyer and seller try to report the interest? It would appear both would have a financial interest; the seller could be sued for the debt if he defaults (I think?) and as was mentioned earlier the buyer would have a lose of the property.



Bill Walston

Real Estate Investor from Northeast TN, Tennessee

Feb 04 '12, 11:26 AM


Originally posted by Jerry Calhoun:

What happens if both buyer and seller try to report the interest? It would appear both would have a financial interest; the seller could be sued for the debt if he defaults (I think?) and as was mentioned earlier the buyer would have a lose of the property.

The seller is not entitled to take the interest deduction, regardless of the "financial interest." Not only is he/she no longer on the deed, he/she is no longer paying the interest - the sub2 buyer is. If discovered, the IRS would disallow the seller's attempt at the deduction.



Steven Hamilton II Verified Moderator

Real Estate Investor from Lake Villa, Illinois

Feb 04 '12, 01:05 PM


Bill is absolutely correct.



Medium_hta_logoSteven Hamilton II, Hamilton Tax and Accounting
E-Mail: [email protected]
Telephone: (224) 381-2660
Website: http://www.HamiltonTax.Net
-Steven the Tax Guy Hamilton Tax and Accounting LLC (224) 381-2660


Dan Inc

Real Estate Investor from Charlotte, North Carolina

Mar 05 '12, 12:13 PM


Has anyone been audited and was OK with this deduction?

My accountant says that if I took a property subject-to with a $500 interest only payment, and a $500 rent, that I'd have to pay tax on all that $500 rent and would not be able to take the interest as a write off. That doens't make sense to me. She disagrees with me and says she has proof from past audits.



Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Mar 05 '12, 12:16 PM


Seriously, you need a new accountant.



Jon Holdman, Flying Phoenix LLC


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