Charlotte, NC · Member since 2018 · 55 posts · 4 votes
I imagine there are some very specific tax strategies for non-performing note investors.
For example, if you purchase a $500k legal balance (unpaid principal + accrued interest/fees) for $200k, then rehab and sell the property for $300k, can you write off the uncollected $200k (the $500k - $300k difference i.e. not pay taxes on your profits, as on paper as the lender, it is a "loss")?
Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
8y
Ehhhh. I am not a CPA, but your basis would be what you paid for the note, not the UPB. In this case 300k - 200k - your expenses. You didn't lose 200k, the seller did, and they would be entitled to count it as losses.
Real Estate Investor · Amherst, VA · Member since 2015 · 386 posts · 400 votes
8y
Ehhhh. I am not a CPA, but your basis would be what you paid for the note, not the UPB. In this case 300k - 200k - your expenses. You didn't lose 200k, the seller did, and they would be entitled to count it as losses.
Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
8y
Yes the 100k profit, or whatever is left over after rehab (note purchase + expenses + rehab = cost basis) will be taxed and most likely as income not capital gains.
Yes the 100k profit, or whatever is left over after rehab (note purchase + expenses + rehab = cost basis) will be taxed and most likely as income not capital gains.
One thing I'm curious about, and never asked my accountant is.. If you own the note for over a year and then it turns into a REO. You fixed it up and sell it in 2 months. That would still be capital gain since you owned the asset for over a year, and the REO was just a different stage of the process. Right? As opposed to purchasing a house to rehab.
Yes the 100k profit, or whatever is left over after rehab (note purchase + expenses + rehab = cost basis) will be taxed and most likely as income not capital gains.
One thing I'm curious about, and never asked my accountant is.. If you own the note for over a year and then it turns into a REO. You fixed it up and sell it in 2 months. That would still be capital gain since you owned the asset for over a year, and the REO was just a different stage of the process. Right? As opposed to purchasing a house to rehab.
No unfortunately not, if your main source of income is active real estate investing and doing numerous deals per year, then its considered income. However if only doing a few deals here and there then may be considered a capital gain. However take my opinion with a grain of salt as each persons scenario is different.
Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
8y
@Daniel E. The answer to that is above my paygrade and I suggest you consult with a 1031 expert.
For this discussion's sake, I would say no for 1031'ing an REO to another note. IMO, that would be real property to personal property. If you 1031'd from REO to other real estate, maybe you're ok. Again, this is my speculation....