Discussion:Deed-in-Lieu Transaction

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Discussion Forum Index --> Basic Tax Questions --> Deed-in-Lieu Transaction


Discussion Forum Index --> Tax Questions --> Deed-in-Lieu Transaction

Heavenly (talk|edits) said:

5 December 2011
Hi all,

Need help with the following scenario occurring in the state of MA.

1. Person A has o/s mortgage of $100,000 with Bank 1 from home purchase. House is now worth $75,000. 2. Bank 1 sells note to Bank 2 for $50,000. 3. Person A signs deed-in-lieu to Bank 2.

Obviously, facts are simplified.

Question - How much are "sales proceeds" upon deed-in-lieu (Person A is personally responsible).

I think the SP is $75,000 (lesser of FMV or o/s debt) with possible future COD of $25,000. Does Bank 2 have a $25,000 gain on the deed-in-lieu?

Thanks in advance..

DaveFogel (talk|edits) said:

5 December 2011
A deed-in-lieu-of-foreclosure transaction is treated no different than a foreclosure. If the debt is recourse (you said that Person A is personally responsible), then
  • the principal amount of the debt ($100,000) minus the FMV of the property ($75,000) is COD income, and
  • the FMV of the property ($75,000) minus the adjusted basis of the property ($100,000) is a loss. If this is a personal residence, then the loss isn't deductible.

Bank 2 would have a gain on the disposition of the note since it receives property with a FMV of $75,000 in satisfaction of the debt for which it has a basis of $50,000.

EasternPA (talk|edits) said:

5 December 2011
How was FMV determined - in light that Bank1 could only get $50K for it?

Heavenly (talk|edits) said:

6 December 2011
Thanks for your reply, Dave. The facts have changed slightly. The acquirer of the note for $50,000 was actually an individual who intends to keep the property it received by deed-in-lieu and put it into service as rental property. Does that person still have a taxable gain of $25,000 currently? If so, I assume the depreciable basis in the rental property is $75,000? Would you mind providing me with a citation for the current taxability of the gain? Thanks again.

Ckenefick (talk|edits) said:

6 December 2011
There's plenty of case law on this. Dave can give you the cites. But as Dave says, the note holder has received property with FMV of $75k for an asset with a $50k basis - $25k gain. So yes, the note holder would take a $75k basis in the property. Of course, you'll need to do a land allocation as well.

DaveFogel (talk|edits) said:

6 December 2011
See Reg. 1.166-6, Bingham v. Comm., 105 F.2d 971 (2d Cir. 1939); Comm. v. Spreckels, 120 F.2d 517 (9th Cir. 1941); Kohn v. Comm., 197 F.2d 480 (2d Cir. 1952).

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