Tax Implications For "Gifted" Notes

[Bryan Hancock]

We are considering "purchasing" a note from someone who wants to get rid of the downside risk in the event that the tenant quits paying. The tenants in the property pay EARLY every month and have done so for over 4 years now so I consider the deal pretty safe. I am obviously going to do some due diligence on their financial situation, but it seems promising. I know for a fact that they pay early because the person "selling" the note is a close personal friend of mine and I have seen when the money arrives.

The good news is that the note spits off around $150/month and we are not paying anything for it. We will have to pay the underlying mortgage (this is a wrap note) if the tenants failed to pay so it isn't a completely free lunch.

My question is whether or not this will somehow be considered a "gift" from a taxation standpoint. I'm not really worried about the risk assessment unless it relates to the taxation aspects. This question is really just about the taxation of the transaction. Is this a gift if we are responsible for the debt and paying nothing for it?

[Dave Toelkes]

This transaction is not a gift. You are buying a wrap subject to the underlying note. Your consideration is the balance due on the underlying note. The seller will assign the wrap note to you and you record your assignment.

Treat this as a subject to deal, Get an attorney to do the closing and make sure the wrap assignment is done properly.