Basis of property acquired by deed in lieu

[DMICPA]

Client lent investor $275,000 interest only and has a non-recourse first trust deed on the real property for the $275,000.

Investor paid interest for a couple of years and now can no longer pay client. Balance is still $275,000. Investor is giving client the property in full satisfaction of the note balance.

FMV of property is presently $200,000.

Question-I believe the basis of the property to my client is $275,000.

Unless my client sells the property, there is no gain or loss to my client. FMV would be irrelevant in this situation to my client.


Am I correct in this?

Bob

[Bees Knees]

I agree. TTB, page 14-11 under "Property Secured by Nonrecourse Debt" says:

Gain or loss from foreclosure or repossession is:
• Full amount of debt canceled by transfer of property.
• Minus adjusted basis.
FMV of property secured by nonrecourse debt is irrelevant to the
calculation of gain or loss.

Thus, when property is exchanged for a nonrecourse debt, it is treated as a sale or exchange. The amount of debt on the property that is being exchanged becomes the selling price.

In your case, the debt equals $275,000. That in turn becomes the selling price of the property for purposes of figuring gain or loss on the sale. If that is the selling price for the seller, that becomes the purchase price for the buyer. Thus, your client bought the property for $275,000, which represents his beginning basis.

[DMICPA]

Foreclosure

Thanks Bees Knees.

The Tax Book and other literature always illustrated the transaction from the Seller's perspective. Although I understood the sellers side, I was looking for something on the buyers side. So, my client has a piece of property worth $200,000 that he paid $275,000 for. My client understands this and is going to hang onto the property to hopefully sell it downline and recover His money.

Bob