Another Forclosure Mess

[Brian EA]

Taxpayer joined with a few relatives and purchased a plot of land .The deed was in one member's name. Each of the investors sent in a check each month payable to the member whose name is on the deed.The property was foreclosed . Value went down drastically.
Can taxpayer claim the $50,000 he invested.

thanks
brian

[erchess]

I would be hesitant

to claim this unless your client's name was on the deed registered with local government or on paperwork with the lender. Put it another way - what evidence other than the testimony of his relatives can your client give that he lost the money? You don't have to see the evidence but you do have do document warning him that the evidence needs to exist. (And don't tell us he has his canceled checks. The question is why he gave the money to his relative.) If he says he wants to try and claim it without evidence then to my mind you need to CYA with the relevant disclosure.

Sometimes a client asks me what I would do if this were my personal return. If I knew I had sustained the loss but wasn't sure I could prove it acceptably I would claim it and disclose the potential problems. I would get the use of money for a while anyway and in the worst case later I would have to pay it back with reasonable interest.

[S T]

And

would there not be some "related party" rules that have to be addressed?

Sandy

[erchess]

Sandy

As I understood OP the related parties went in together and bought the land in an arm's length transaction and the lender (who may or may not have been the seller) foreclosed resulting in loss. What relevance does the family relationship among the buyers have other than that an auditor might be inclined to want more than just assurances from all of them as to the facts of their arrangement?

[S T]

Sorry

I was thinking Brian's t/p sold to the remaining family members, when maybe Brian's t/p was only involved in just purchasing/investing with family members. My mistake,

Altho, Brian, I would certainly want documentation on your t/p's investment in this transaction before pursuing a loss deduction. Agreements, canceled checks or loans for the investment, etc. Someone should be able to provide an accoutning, if "that someone" were collecting funds from all of the various parties. Paperwork on the foreclosure to the "member" Sounds like a LLC? Was there an LLC formed that your t/p is not aware of? in which case a K-1 should be issued.

Sandy

[erchess]

LLC Sandy

My guess is that these family members obtained no advice concerning taxes or anything else. Whether the idea originated with one or more than one of them the day came when they all thought a particular piece of land was a good investment and they pooled their funds and bought it. Probably anyone on this board would think of an LLC if we were involved in a similar undertaking but people who are neither lawyers nor tax professionals do not think of forming LLC's or other entities when they go in with people they trust to buy or sell something.

[Lion]

Fllp

Families seem to be forming FLLPs around here, sometimes for seemingly less than business or investment purposes.

[Brian EA]

My guess is that these family members obtained no advice concerning taxes or anything else..

That is exactly what happened.Brothers, sisters and brother-in-laws pool their monies and decided to do a little investing when the market was going great. One of the brothers decided that he would run the show ,so he took all the responsibilities.The deed was in his name. Now that the bubble is burst and the land value is less than the mtg no one made any payments. My client invested about $55,000.He has copies of his cancelled check made payable to his brother in law. Guess he is in for a shocker
brian

[iratax]

There is also the possibility that there will be a 1099-C coming and cancellation of Debit income. Don't have enough info to know for sure or not.

[JON]

$55,000

what did they buy Pebble Beach. Obviously, some portion of that went for interest payments so if he was not getting the deduction for that why would that give him any basis. I agree if they are chasing the guy whose name is on the mortgage he should be getting the 1099-C. He has a problem. Your guy's problem is would the IRS say your guy has a valid ownershi interest, or valid loans or nothing to his relative???? Good luck.