Loss

[S T]

I have a t/p that just informed me he had invested $25,000 in 2nd TD and they went to foreclosure and receivorship on 12/22/08. I have the paperwork

Over the time he has had this investment, he has received interest payments which have been reported for what has been received, but not in total and no payment to principal.

Question, the loss would be a capital loss as bad debt deduction, only for the original investment of $25,000, and you would not include the loss of the interest that has NOT been paid and can be claimed subject to limits of $3,000 on the 2008 tax return. The receivor suspects fraud, however, there is no proof and the Receiver is not necessarily pursuing. Receiver is only pursuing a bankruptcy claim against a few individuals that guaranteed the notes and probably with little hope of recovery.

Thanks,

Sandy

[Burke]

I have a t/p that just informed me he had invested $25,000 in 2nd TD and they went to foreclosure and receivorship on 12/22/08. I have the paperworkSandy

What is "2nd TD?"

[S T]

It is

an investment in 2nd Trust Deed notes recorded against Real Estate!

Example: A large real estate project needs additional capital that they can not obtain from a regular lending institution, so they raise monies, by issuing small 2nd trust deed notes from many private investors. A private investor can usually receive a higher rate of interest, than they can at a bank opening a Certificate of Deposit.

Sandy

[JG EA]

Does your client have any interest (now) in the property? If so, wouldn't this be an increase of basis. (Like getting back a property that was sold on installement?)

[S T]

No Interest

T/p simply invested some money in 2nd Trust Deed "notes", so once the Primary Lender foreclosed, it is done!

T/p rather than go to his local bank and invest $25,000 into a CD at a nominal interest rate, opted to contact a Financial Company that deals in 2nd Trust Deeds on various real estate. T/p invests the $25,000 for a 2nd TD at a given interest rate (a note) that is to pay X% interest and is due and payable at X date in time.

The property has now been foreclosed on, and ALL of the 2nd TD note holders are obviously not in a position to make the 1st mortgage payments that are in default, so now their investment is gone!

Sandy

[erchess]

Sandy I hesitate to post about this

but here goes. Of what tax consequence is the fact that the debt your client purchased was subordinate to other debt? I think that the tax relevant facts are that your client invested some principal for which he was supposed to get interest and return of principal but (and why is irrelevant) he got some of the interest and then was informed that he would neither get more interest nor get his principal back.

I would think that the interest hie did actually get is taxable just as if it were all he had expected on Sch B.

I would think that there is no deduction for the interest he hoped for but never got unless for some reason he had previously reported the interest as income.

I would think that he would have a SCH D worthless security with basis equal to his principal. I can see an argument for treating it as a SCH A non-business bad debt but that's less advantageous and I can't think of any reason why what your client bought was for tax purposes different from a garden variety bond. Certainly if things had turned out differently and he had sold the debt no one questions that we would have a SCH D Sale.

[JG EA]

That sounds right to me also. Investment loss.

[taxea]

Has he received anything in writing that documents the loss yet? If not I would think that he would need to attempt to get his money back before he can declare a loss. taxea

[S T]

Documents

I have copies of the foreclosure and the receivorship, all concluded on 12/22/08 as stated in my original post. The only open item would be the receivor pursuing bankruptcy action on behalf of creditors by the two parties that signed as guarantors.

Thanks,

Sandy

[taxea]

Is there any chance the bankruptcy court will throw out this item? If so I would wait for the outcome before declaring anything on a return. i.e the money isn't lost until it is lost.taxea

[S T]

bankruptcy

I doubt there will be any recovery, too much owed, too many creditors, assets are "missing" based on the documentation we have from the attorneys. Doesn't look like there would be much effort placed.

If by chance any of these t/p that receive something from Bankruptcy court, we could always claim that amount the year received, correct? I have experienced that before and usually the t/p receives a 1099 form for such?

The issue is that several of these t/p involved have been in all of the "chat rooms" and are likening to the "Madoff" issue thinking that they can write off all as a "Theft Loss" including the interest, which is not my thought, so I have to provide some answers to MY t/p with some substantiation. The letter from the attorneys of course won't provide any tax advice, however, they are saying that the foreclosure is concluded.

A number of you have asked whether you can take a bad debt deduction or fraud loss on your tax returns with respect to the XXX1 and XXX2 Loans. With respect to proof of a loss, the proof of foreclosure provided in our periodic correspondence, available on the
website, the complaint seeking appointment of the Receiver, the Order appointing the
Receiver, and the Receiver's email notice of the completion of the foreclosure sale should
provide proof of loss.
With respect to either tax advice or "proof' of fraud perpetrated by the principals of XXX
Company, the Trust cannot provide you either with tax advice or with formal "proof' at this time. There are certainly numerous allegations of fraud that the Trust has made in its complaints in the United States Bankruptcy Court and the United States District Court in the District of XXX None of those complaints specifically address the XXX Loan. And to repeat, perhaps more importantly, the Trust is not in a position to provide you with tax advice.

Sandy