recovering property via foreclosure


R

Reggie

Taxpayer sells real estate, and takes back a first mortgage. Buyer then
defaults,and the taxpayer takes back the real estate via foreclosure.

What are the tax implications of:

1. taking back a first mortgage. I believe the sale is complete and stands
on its own, and the mortgage is treated as a separate transaction.

2. recovering the property via foreclosure. I believe this is a new
acquisition, with the basis being the unpaid principal on the mortgage plus
whatever legal and transactional costs that are incurred to accomplish the
foreclosure.

Is this correct? any other thoughts?
 
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S

Stuart A. Bronstein

Reggie said:
Taxpayer sells real estate, and takes back a first mortgage.
Buyer then defaults,and the taxpayer takes back the real estate
via foreclosure.

What are the tax implications of:

1. taking back a first mortgage. I believe the sale is complete
and stands on its own, and the mortgage is treated as a separate
transaction.
There is both a mortgage and a note. The mortgage simply secures the
note and allows the creditor to have the property sold to satisfy the
note if payments are not made on time. In most places a mortgage
does not simply allow the creditor to take the house, but the house
has to be sold to the highest bidder, and the creditor gets paid up
to the amount owed to him.

If the creditor makes what is generally called a full credit bid
(bidding the amount owed at the foreclosure sale) and as a result
buys the house, when he sells it that is a separate transaction. But
the foreclosure sale itself is not.
 

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