All Forum Posts by: David Hadley

I don't think anyone has "chewed you out" ... yet. We've offered some opinions on your situation that seem to be contrary to what you want to hear, if that's what you mean.

Personally, I don't like the attitude that leads people to believe that the upside of an investment is all theirs but any losses should be borne by the bank / society. If you've ended up in the situation you're in because of a lost job, medical bills, etc., then that's one thing, though you should still be doing everything you can to make good on the situation (i.e. selling the lot and using the proceeds to help you get out of your predicament).

If you paid more than you could afford, using a loan that you knew would reset to a payment you wouldn't be able to make in order to try to make money from appreciation, then I have no sympathy for your situation.

With that said, if you have a non-recourse loan on the house and the vacant land does not have a deed of trust / mortgage against it, the vacant land is probably safe. Check with your lawyer.

Jon, I believe that there is a good chance that the bankruptcy trustee / judge will hold to a higher standard than just a transfer after a missed payment. I believe that there is usually a time limit applied, as in "anything transferred, in anything other than an arms-length transaction, within a year prior to filing to be included in the proceedings".

Sounds like your friend needs to talk to an attorney. I'm not one.

If your friend owns the property in a recourse state, then the lender will be able to get a deficiency judgment on the foreclosure if it sells at auction for less than is owed. This judgment can be reattached to any other property your friend owns.

Also, if she has in fact transferred the property out of her name and has done so in anticipation of defaulting on the other mortgage, she is at risk for being charged with fraud. A court will look at her financial situation when she transferred the property and if it is obvious she was in trouble when she transferred it in any manner other than an arms-length transaction (e.g. quit claim deed), lots of bad things can happen to her and even to the party she transferred it to.

Furthermore, why wouldn't your friend sell this vacant lot and use the proceeds to pay off / pay down the mortgage on the property in foreclosure? Isn't this the responsible thing to do?

Where in Colorado are you finding houses "on the market" that will cash flow or is your advice based solely on appreciation speculation?

Do you have an MLS number or three that you can point to?

I want to personally thank the people I know for their service to our great country. Freedom isn't free and they've all paid, some with all they had.

Thanks Tony. Thanks Chris. Thanks John. Thanks Don. Thanks Grandpa.

Yes, I think Jon nailed it. There is a difference between UBTI and UBIT. It took me several days of googling around before I noticed the difference!

I'll just add that, AFAIK, debt financed property in an IRA is taxed at trust rates, which I believe is what Jon used in his example above. I'm not 100% positive of that however, so I guess that will become Question #5.

Another exemption appears to accrue to 401(a) retirement plans. Not sure what those are yet, however.

Real property debts of qualified organizations. In general, acquisition indebtedness does not include debt incurred by a qualified organization in acquiring or improving any real property. A qualified organization is:

1. A qualified retirement plan under section 401(a).

... [p. 15]

Hi Will,

I've read pub 598 cover-to-cover with highlighter in hand. I still haven't found a decent CPA in this area. Very frustrating!

With respect to my own reading:

Q1: It seems very clear that "outstanding debt / basis = UBTI" is the proper formula.

Q2: I agree with you.

Q3: Pub 598 seems fairly clear that depreciation is allowed in proportion to the debt-financed portion (see pg. 18). If you know of rules specific to IRAs that are contrary, I'd appreciate a citation as I'd like to read up on that.

Q4: Still have no idea! Again, if you have an IRA specific citation, I'd love to have it.

I've yet to confirm any of this with a CPA.

P.S. I also came across this tidbit from pub 598:

Certain federal financing. Acquisition indebtedness does not include an obligation, to the extent it is insured by the Federal Housing Administration, to finance the purchase, rehabilitation, or construction of housing for low or moderate income people. [pg. 16]

I'm interested to know what specific FHA programs this is referring to.

Hi Jeremy,

It's looks like you're finding good performing investments. Those are very nice looking properties!

I'm not sure how useful your "actuals" are, however, in the format you've presented them. I notice that you are including damage deposits in your cash flow analysis, which is correct, but using that to figure "profit" is not, in my opinion. There is a difference between a cash flow statement (which is what you are showing as "actual") and a profit & loss statement. I think you need both (plus a balance sheet) to really examine property performance.

A month-by-month P&L with proper pro-rata expenses (e.g. taxes) and set-asides for maintenance reserves and the like might tell you more about how your properties are actually performing.

Great read, nonetheless. Thanks for sharing that with us.

If you're not familiar with 1031 like-kind exchanges, do a little research on the topic. 1031 exchanges are an IRS provision that allows you to delay paying capital gains taxes on real estate by "trading" it for other property.

Essentially, after you sell a property, you have 45 days to identify another property with a basis equal to or greater than the basis in your old property. You then have 180 days to close on the property. You need to use a qualified intermediary and there are a few other details, but that's the gist of it.

It's an extremely useful technique in many situations. Hop over to irs.gov and search for publication 544. Discussion of Nontaxable Exchanges starts on page 10.

I don't know about your market, but in mine rents are increasing. I believe it's to due to a couple of factors:

1. We're currently experiencing a credit crunch. People who can afford a home, can't get a loan due to the tightening of lending standards, so they must rent.

2. We have a lot of people who have lost their homes to foreclosure due to ARM rate resets. These people still have jobs and still need to live in the area. At the same time, the houses they've lost haven't made it through the foreclosure/REO process back onto the market. The net result is rental demand is up while supply is down.

Personally, I expect rents to level off in a few years and eventually decline a bit as these things sort themselves out. But timing is everything and it's a good time to buy and hold rentals, at least in my market.

If we experience a severe recession, however, all bets are off.

That was a rhetorical question, but I'm going to answer it anyway. The recent 2-day auction here in Denver was held by REDC. Their auction guidelines specifically state that the auctioneer is authorized to bid the wall, or in their words:

"Except where prohibited by law, the auctioneer may open bidding on any property by placing a bid on behalf of the Seller and may further bid on behalf of the Seller, up to the amount of the Reserve price, by placing successive or consecutive bids for a Property, or by placing bids in response to other bidders."

Personally, this type of auction leaves a bad taste in my mouth.

I saw a news story on a local station regarding this auction after the first day. It felt like an infomercial. They mentioned several times that prices started at $1,000 on some houses (but of course made no mention of a reserve price) and they interviewed one buyer, who apparently bought a property for 75% of it's "worth", which paging through their catalog appears to be the highest price it had ever been listed for.

The reporterette never once mentioned an actual price that someone paid for a house. I wasn't able to attend so I'm not sure if that's because there weren't many sales or the sales were not really "deals" or some combination thereof. I know a RE agent that attended so I'll get a report on Monday.