Need help! Mortgage assumption..

[Zee]

I stated my opinion earlier, I believe 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) and the final payment is simply a balloon payment. On the other hand, if the contract is "conditional" on obtaining financing the actual sale doesn't occur until that condition is met and I would suggest treating the payments as rental income (I assume the cousin is going to be living in the house) and recognizing the sale when the financing is obtained and the balance of the mortgage paid by the buyer.

[mastertaxguy]

These posts offer well intentioned advice and comments, but it appears to this observer this is not a tax issue in the first instance but rather a legal issue for which, absent someone being a member of the bar in the jurisdiction, no one should be providing legal advice.

Don't make this your problem preparer. If TP will continue paying mortgage, TP will or may have a mortgage interest deduction. Perhaps it would be best not to speculate and wait for the 'deal' to be completed if it is to be completed.

If you doing this to "help the client" get out now before it is too late: It is not your problem.

[Zee]

Legal advice? I don't think so

I'm not a lawyer, but I have stayed at Holiday Inn Express on occasions...

In my opinion, none of the responses constitute (or evens comes close) to the "legal advice". Reviewing mortgage documents to determine if a "due on sale" clause isn't legal advice, and determining whether a taxable event (sale or rent) actually will occur isn't "legal advice" nor is suggesting the structure of a sale as a rental rather than a sale. I suppose one could argue that all tax advice is legal advice since tax law is based on statutes, and tax planning does involve interpretations of tax law. So...maybe the caution is good advice in some situations but I haven't read anything close to providing legal advice here.

I suppose this could be good topic for discussion though....at what point might a tax preparer cross the line and be offering legal advice requiring licensing as an attorney? Preparing legal documents might be one situation...for example a loan agreement.

[Burke]

I had a somewhat similar situation. Divorced couple sold home to other couple who could not qualify for financing. In this case, it was sold with a promissory note to the sellers. Sellers sold the home (there was a HUD-1) with a Deed of Trust, but were still on the original mortgage with the bank until it could be paid off. Whether the bank was even aware of this, I do not know. The buyer's note was for 3 years (like yours for 4), with a balloon payment at the end. Sellers reported interest income 50/50 and deducted investment interest on Sche A, up to the amount of investment income. Payments were made to the seller, who then paid them to the bank. Real estate taxes and insurance were treated as pass-through items. Buyers ultimately defaulted, foreclosure ensued, and home was subsequently sold outright for cash to another buyer. Since they met the 2 out of 5 rule, gain was treated under Sect 121 exclusion on the first year's return.

[TXEA]

Simply have an attorney tell you when the cousin assumes an ownership interest in the property. If it is day 1, then you have an installment sale that should last for 48 months and a day. Or, the cousin will default and you will take the property back.

If it is day 1460 (four years from now) then you sold the property for the balance of the mortgage and you rented it to them for 4 years.

A HUD-1 settlement statement should indicate when the property transfer takes place.

It seems pointless to speculate when none of us know when the property transfers to the cousin under state law.