All Forum Posts by: Diane E.

@John K. - I'm a PPR fund investor, I'm happy with them, and I sent you a PM.

Interest on personal residences has some limits, but those limits don't apply to rental properties.   Even after a refinance, you can deduct all interest currently unless the extra interest expense puts you in a net loss position.  If you have a net loss, you may be subject to passive loss limitations depending on your personal tax situation.

I agree with what @Bruce Lynn had to say.  Another consideration is the redemption period, which is 2 years for owner occupants.    You have to be willing to hold the tax sale property as a rental for 2 years, because you'll find it hard to get title insurance before 2 years even if not owner occupied. 

The auctions are very competitive in Texas major metros and hedge funds are bidding at full price.  You may be able to find deals in the smaller counties.

@Daniel Peavey :

1.  If you originated a note, you will also originate a security agreement (either a mortgage or a deed of trust, depending on the state).  You would record the security agreement.  The security agreement is what makes the property collateral for your note.  You would foreclose to enforce your security agreement.

If you sold the note, the note buyer will expect to receive originals of both the note and the mortgage or deed of trust. You would assign the security agreement.  The assignment needs to be recorded. You would also endorse the note.  

@Jerome Adams  Definitely worth making the time to go to Dave van Horn's group.  From his posts, obviously a very knowledgeable guy and willing to help.  I think you will learn a lot.  Let us know how it goes! 

@Patrick Desjardins Good question.  Yes, now I feel confident in buying and managing a note if you send me a note tape tomorrow.  Feel free to send my way.  I actually have bought a note (and have learned a lot from that) and have joint venture investments with other note investors.  Part of a process.  

@Eric Hyde Agree, Scott has lots of great info.  I've also talked to Gail Greenberg and she seems like she would be great to work with.  

So here is my take.  I haven't done any of the mentoring programs available from Eddie Speed or Scott Carson (both mentoring programs run $15K or more) but I've taken intro courses from both Eddie and Scott.  I took Eddie's 3-day intro courses on nonperforming and performing notes.  That was about $1K or so.  The time and info was worth it as a good intro, but then there was a hard sell for Eddie's mentoring program.  I've also taken Scott Carson's Virtual Note Buying for Dummies ($700) and attended his Note Camp.  Both of those were worth it and didn't hard sell the mentoring program.  I thought Eddie's course was a better explanation of legalities, but Eddie has done this for many decades and some of his practices don't seem that current compared to Scott's.  For me, Scott's course had a much better focus on marketing, including social media marketing, and asset acquisition.  Scott also puts out a ton of info for free.  Check out his podcasts on weclosenotes.tv for replays.

A new education option that just became available is the Note Investing Academy.   I thought the course was comprehensive, well sequenced, and definitely worth the pre-launch $2K price I paid.  Three different instructors present videos on their areas of expertise.  For example, there's a  1+ hour video with an ex-kindergarten teacher turned note investor explaining how to do due diligence on a tape. There is a video with nuts and bolts of collateral file review, including documents used with contracts for deed.  A marketing guru explains branding and social media marketing.  There's a section on setting up your company.  This course seemed to me to have everything in one place, without spending days or signing up for a mentoring program to get to critical missing information.  They have taken a lot of time to make the videos complete but concise.  This course is still being finalized but you might want to check it out.  

And of course, these are just my impressions.  Your mileage may vary.

1)  Accrued ratably means to multiply the total discount by the following fraction:

(A) the number of days you hold the note, divided by

(B) the number of days after the date you acquire the note and up to (and including) the date of its maturity.

You take this amortized amount as ordinary income when you sell the note or you can elect to take a piece into income each year.   

Example:  Note face $500,00, purchase price $200,000, 25 years remaining until maturity.  Market discount is $300,000.

Principal payments received were $25,000.  Note is sold for $250,000 after 2 years.  Gain = $250,000 - $200,000 purchase price - $25,000 principal payments = $75,000 gain.  This gain will partly be ordinary income due to market discount accrual of 2 (years held) / 25 (years until maturity) times $300,000 market discount = $24,000.  The remaining $51,000 is long-term capital gain.

2)  Principal payments aren't taxable income.  Principal payments reduce your cost basis, so this increases your gain when you sell.  See the example above.

I'm a CPA, and these are my observations.

My take is that note investors have a couple of different payment pieces.  The first is borrowers' payments treated as interest income and principal paydown on the original note.  Unless you modify the note, the borrower's interest expense is based on the original amortization schedule.   So, the note buyer will recognize interest income based on the borrower's paydown of the original note balance.  

However, the note buyer investor bought the note at a discount to the face value.  This brings in a second payment piece:  the discount element.  For investors, it would seem that any amounts received in excess of the cost basis would be treated as capital gain (long-term or short-term depending on holding period).  However, debt acquired at a discount from the face value may be considered subject to rules known as the "market discount" rules (Internal Revenue Code Section 1278(a)(2)).  

A May 2010 bulletin from the real estate restructuring group of Syracuse & Hirschtritt LLP discusses market discount income. See http://www.thsh.com/documents/NYDOCS1918310-v3-Rev... .  In general, the market discount income is considered ordinary income accrued ratably over the remaining term of the mortgage.  Per the Bulletin: "For example, if the purchaser acquires a $10 million mortgage debt with three years remaining until maturity for a purchase price of $7 million, and one year later sells the indebtedness for $10 million, the purchaser will recognize $1 million in ordinary income (the accrued market discount portion of the gain) and $2 million as a capital gain."  

Some argue that when a default has already occurred, the market discount rules don't apply and gain should be treated as capital gain.  The most conservative position would be to ratably amortize the market discount and include the market discount amortization amount in ordinary income.

You can have W-2 income that qualifies for your solo 401k if you change your form of entity to an LLC that elects to be treated as a corporation, then elects S corporation status (you could also just change to a corporation). This works if you don't have any employees. You could also save some on self-employment taxes. Amanda Han (CPA) touches on this peripherally in the last podcast. Your clients would just contract with your entity for your services, and make payment to your entity. I would suggest you spend a few bucks with Amanda or someone like her and review this option if you think that's something that would work with your clients.