Need help! Mortgage assumption..

[hac42]

Here is what I know. TP tried to sell her home, but could not. So now she has her cousin in the home who is going to assume her mortgage. The credit union TP has mortgage loan with is allowing the assumption. TP WILL still be listed on the mortgage and in 2 years TPs' cousin will take over the loan. There will be no increase in the loan.

There is no upfront money and the credit union had to approve this. Monthly mortgage payments will go from cousin to TP and TP will make the payment for the next 2 years and then her cousin will take over the loan and TPs' name will be removed from the mortgage.

I am thoroughly confused.. as to were to start

[MDEA]

Mortgage assumption

When is the title going to be transferred? That must be known before this can be answered.

[hac42]

To my understanding the title will be transferred at the end of 2 years.

[hac42]

More information for original post...

I keep reading in various places and can't find to much on mortgage assumptions. Everything refers to contract for deeds/land contracts and installment sales.

TP is not receiving any additional money or profits. She was divorced and just wants to get rid of the house. So if I report it as an Installment sale I will have no income to report on Sch B. just Principal payments, because the payments she receives is the exact amount of the mortgage payment for each month.

[FEDUKE404]

Not really a clear answer at this time

What a mess. As MDEA stated, more facts needed.

Otherwise, there could be a number of possible scenarios.

TP could be "renting" house for monthly mortgage payments. Think Schedule E. Think depreciation - "allowed or allowable."

Seems like home is definitely property of TP as no sale (regular or installment) has yet occurred.

Worst case scenario: Cousin cannot take interest (not legally liable for loan and/or secured by a home owned by cousin) and then TP cannot deduct interest (it was reimbursed each month and/or not primary or perhaps secondary home).

Whose idea was this in the first place??

Good luck. . .

FE

[Zee]

It sounds like a property conversion and lease with an option to buy

My two cents...

The structure of the transaction appears to be a lease with an option to buy in two years. The Credit Union is simply agreeing to finance the purchase with a mortgage assumption. As such, the rental/lease income/expenses should be reported on Schedule E. When the property is converted, the basis for depreciation is the lower of the adjusted basis on the date of conversion or the Fair Market Value (FMV) of the property at the time of conversion.

When the mortgage is assumed, a sale of the property will have occurred and result in a gain/loss. At that time, the basis is calculated differently for gain or loss. When the property is sold at a gain the basis is the original cost plus amounts paid for capital improvements, less any depreciation taken. When sold at a loss the starting point for the basis is the lower of property original cost or the FMV at the time it was converted from personal to rental property. If the property is rented for three years or less then sold, you still may be eligible for the 250,000 gain exclusion or 500,000 for married filing jointly.

[Gary2]

If the total cost is the assumption of the remaining mortgage payments, then it seems most likely the property is being sold at a loss - unless it was refinanced at some point for an amount much higher than the purchase price.

[hac42]

TP has given more information..

TP informed me that it is set up "like" a Contract for Deed, except no interest will be charged and no money will be paid to TP.

Sometimes getting information is like pulling teeth from some TPs'!

[Burke]

Ask her for the HUD-1 statement. That will show (if there is one) that it is a sale. It sounds like it is, as I cannot imagine the CU agreeing to the cousin taking over the mortgage after 2 years if this is not the case. It is a sale during which your client will collect the mortgage from the cousin and pay the credit union (per your original post). The CU wants your client's liability to remain on the loan so that the loan will be paid. If it is treated as an "installment" sale, then your client should report the interest as income from the cousin on Sche B, and deduct the mortgage interest as investment interest up to the amt of investment income on Sche A. If the house was sold for the outstanding mortgage amount, then it was likely sold at a loss, which is non-deductible. Since there is no gain, no 6252 is needed.
You say "there is no interest" but if the cousin is paying the mortgage payment, there IS interest just like it was when the client was paying it directly. And possibly real estate taxes and HO insurance as well, as part of the escrow. Get the amortization schedule from the CU to determnine what is included.

[Zee]

Assuming the transaction hasn't been completed, Most mortgages contain a due-on-sale clause. The clause calls for immediate repayment of the mortgage upon sale or transfer ('conveyance') of the property securing that mortgage. Transferring ownership interest to a home buyer using a contract for deed typically triggers a preexisting mortgage's due-on-sale clause.

It appears your client’s Credit Union has agreed to allow the sale and remove the “Due on Sale” clause from the mortgage. I would suggest your client review the mortgage addendum they are offering closely.
With the Contract for Deed, the Seller remains liable on the loan until it is paid. If there is a default on the payments on the Contract for Deed and the seller doesn’t make the payments, the loan will be in default.

To protect the Seller, the Contract for Deed generally provides that upon default, the Buyer's interest terminates and all sums previously paid are rent.

Since this is a Contract for Deed, the transaction will be generally be reported as an Installment Sale for tax purposes. However, Burke may be correct, if there is a clause including the contingency.

[hac42]

TP is getting me a copy of the Contract from her CU.

She said she, if her cousin defaults on the payments she(TP) will still be liable for the payments to the CU. At the end of the term 48 months (which changed from 24 months, since I last talked with her) TPs' cousins has to pay the existing mortgage off by cash or with her own financing.


Burke- When I say no interest I meant, no additional interest other than what is charged on the original mortgage by the credit union. Thanks for clarifying that.

Zee- I believe there is no "Due on Sale" clause

Thank you both for all of your insight. This is one of the "situations" that came to light now and not in April!

TP contacts me daily, with what seems like bits of information on a 1000 piece puzzle!

[JohnH]

I think you will want to do some research on the subject of "Beneficial Owner". This will provide some useful guidance of how the seller and the buyer should handle the transaction, interest deduction, property tax, etc.

[Zee]

TP is getting me a copy of the Contract from her CU.

She said she, if her cousin defaults on the payments she(TP) will still be liable for the payments to the CU. At the end of the term 48 months (which changed from 24 months, since I last talked with her) TPs' cousins has to pay the existing mortgage off by cash or with her own financing.


Burke- When I say no interest I meant, no additional interest other than what is charged on the original mortgage by the credit union. Thanks for clarifying that.

Zee- I believe there is no "Due on Sale" clause

Thank you both for all of your insight. This is one of the "situations" that came to light now and not in April!

TP contacts me daily, with what seems like bits of information on a 1000 piece puzzle!

OK. Let's try to clarify things a bit. The taxpayer is the owner of the property, and the Credit Union is the mortgage holder. As such, the Contract for Deed represents an Installment Sale between your client (the taxpayer) and the cousin (buyer). It appears the Sales price is the unpaid balance of the mortgage after 48 months (that's available from the Amortization schedules) If the mortgage doesn't have a "Due on Sale" clause(almost all do), the Credit Union's approval isn't required for the sale. So, why is the Credit Union involved?

My guess is if you obtain the mortgage documents there is a clause. I don't understand why the remittance is being made directly to the Credit Union. I suppose it could be included in the conditions of the Contract for Deed, but it doesn't provide any additional protection for your client. In fact, if I were the seller I'd rather have the payments made to me to ensure the bank receives their payments promptly and I'd know right away if payments stopped.

I think structuring the transaction as a Lease with an Option to Buy would have been simpler, avoided Credit Union involvement, and may have added a tax benefit with a small increased loss. I do hope you can explain why the Credit Union is involved in this transaction if it isn't a requirement of the mortgage.

[JohnH]

Since we are speculating here, I'll add mine. The contract almost certainly has a due on sale clause. The buyer apparently can't qualify for a loan, seller is desperate to sell. So they probably went to the credit union to lay out the situation and ask for advice on how to handle it in a straightforward manner and avoid the risk of getting in the lender's bad graces. The credit union agreed not to enforce the due on sale clause, and to allow the buyer to make payments for a couple of years to establish credit. If all goes well for 2 years, the credit union will probably write a new loan for the buyer. This sort of thing would be very unlikely to happen with a bank, but most credit unions operate with a different mind set. (They actually endeavor to serve their customers)

The properly recorded contract for deed, coupled with their actually having made the payments, will very likely enable to buyer to deduct interest and taxes. But even if they ultimately lost the tax deduction, the extra taxes they pay would simply be the price of being able to buy a home they could not otherwise qualify for. The seller can just treat this as a non-deductible sale of their personal residence at a loss. All in all, a fairly low-risk transaction all around. Kudos to them for handling it in an above-board manner, and kudos to the credit union for working with them.

The main thing the seller would need to worry about is the issue of whether the payments are being made. I suspect the credit union has agreed to notify the seller if there is a delinquent payment, because the seller's credit would be impacted immediately, plus the eventual transfer of the loan would be in jeopardy.

[hac42]

then is it reported as a Sale of Home or Installment Sale??

I haven't not been given the contract for deed document yet. TP said she will get it to me as soon as she can. I am hoping then all the holes in this scenario will be filled in.

Am I correct in filing her taxes, reporting it as a Sale of Home and not an Installment Sale?

Thank you all for your thoughts on this.