Is this a Sale?

[ILLMAS]

TP had a bought a house back in 2008 cash, renovated the house, his total cost was 100K (cost of home + improvements), he wanted to refiance it however no bank wanted to help him, so he sold it to a brother for 95K in order to take out money. Basically he just sold it to the brother in order to get money to finance other projects, he still contines to collect rent, pays the mortgage and other expenses. I don't know if this would cause a red flag, sells the home and contines to report it as if it was his???? FYI there is a sales contract.

Thanks

MAS

[rfassett]

You have to follow the lines, or the trail, if you will. You have a couple of transactions going on here. Brother owns the property and is receiving rent from the first owner (the seller). Rent would be equal to whatever the first is paying on behalf of the new owner. So new owner has a schedule E on this property. Old owner has turned around and sublet the building. He also has a Schedule E on this property. He does not, however, have mortgage interest expense. That belongs to his brother.

[jainen]

>>there is a sales contract.<<

A sham transaction--apparently there was no intention to transfer the rights and responsibilities of ownership. Did he record a new deed, which would probably have triggered a due-on-sale clause in the mortgage? To me this looks more like the brother lent him money secured by the property, economically similar to a second mortgage.

[BulldogTom]

And if you treat it as a sale, I think you have a related party issue that will cause the loss of 5K to be suspended.

Tom

Lodi, CA

[ILLMAS]

Thanks everyone, this sure looks like a sham, I guess the TP was thinking it was going to be treated as it was a refinance. I contacted an associated of mine, he mention having the brother coming in as a partner in the business, and the amount he didn't finance, to put down as a capital contribution, and of course putting all this down in writing or going through an attorney draft something up.

[jainen]

>>TP was thinking it was going to be treated as it was a refinance<<

I believe you are right, and I shouldn't have called it a sham if there was no intention to deceive. "Invalid" would be a better word. In this case, the "sale" was just an unusual form of refinance. Private money often takes unusual forms. Tax treatment of the rental including the purchase mortgage would continue as before. Note however that any costs or interest payable to or on behalf of the brother would not be deductible as rental expenses, because the loan proceeds were used elsewhere.

[ILLMAS]

"Note however that any costs or interest payable to or on behalf of the brother would not be deductible as rental expenses, because the loan proceeds were used elsewhere."

Thanks Jainen, if understand the the above, any payment made by the brother will not be deductible on the partnership return correct? At this point, the TP is making all payments related to the property sold (including the mortgage), the brother doesn't pay for anything. Something else that has me concern is the depreciation expenses, who gets to deducts it???

[jainen]

>>who gets to deducts it?<<

In my opinion, it sounds like the transaction would have no tax effect at all, so (as I already said), tax treatment of the rental including the purchase mortgage would continue as before.

[jainen]

>>any payment made by the brother will not be deductible on the partnership return<<

Ummm, yes, well there isn't any partnership return and the brother isn't going to make any payments, so I suppose that's true.