Buyers question taking out loan for more than home’s value
Ilyce R. Glink
Q: Our friend has a house for sale. Unfortunately, he owes more than it’s worth. He has a mortgage of $770,000 on it and cannot afford to come to the closing with any money.
He is willing to sell the house to us for $700,000, and wind up with a net loss of $70,000. He’d like us to take out an interest-only loan for the $770,000. He would make the interest-only payments of $70,000 until he can make payments to erase the $70,000.
Do we have to notify the lender who would be giving us the loan of $770,000? Is this illegal to accept payment from the seller on the side for the $70,000?
A: So your friend would like you to buy his home and not be truthful to your lender (and perhaps his lender) about the transaction. That would be wrong and may even be illegal. If your seller is selling you the home for $700,000, then your disclosure to your lender should be a purchase price of $700,000.
The seller intends to have you buy the home for $770,000 and then intends to pay you back $70,000. The net effect is a $700,000 sales price.
Your seller wants to pay back his lender and avoid a short sale. A short sale is when you sell the property for less than the loan amount and the lender accepts that payment as full payment for the amount owed.
The seller’s credit may take a big hit for failing to pay off the loan in full and may even have to pay federal income tax on the $70,000 that was not collected by the bank. (If the home is the seller’s primary residence, the federal government recently changed the rules and the seller would not have to pay tax on the amount that was forgiven up to $2 million.)
Your best bet is to avoid the transaction your friend is proposing. If the house isn’t worth $770,000, but it is worth $700,000, and you’re willing to pay that amount, your friend should try to negotiate with the bank to accept the short sale. As part of this agreement, your friend could negotiate with the bank not to report the short sale to the credit bureaus as an adverse credit issue.
As an aside, if the property is really only worth $700,000 and you need a loan to purchase it, your lender will send out an appraiser to determine the value of the property. If the appraised value is $700,000, your lender will never give you a loan for 10 percent more than the purchase price.
If the appraised value of the home is really $770,000, then your friend should attempt to sell the property for that amount and pay off his debts in full.
Q: My siblings and I recently inherited some apartment buildings in Orange County. I understand that if we keep the buildings, we can keep the current property tax bill as well. We are considering a like-kind exchange for apartments in another city in Orange County. Is there any way to carry over our 1960s tax amount?
A: Potentially you are asking two different questions regarding taxes. One question may have to do with real estate taxes and the other with the amount of taxes you would have to pay upon the sale of your real estate.
A like-kind exchange is a mechanism used by investors in real estate (and also with other types of property) that allows the investor to defer the payment of federal income taxes. It is also known as a 1031 tax-free exchange.
Simplistically, if you purchased a property 10 years ago for $100,000 and now it’s worth $1 million, you would potentially have to pay taxes on the appreciation and would have to pay taxes on any tax benefits you received on the depreciation you took on the property while you owned it.
A like-kind exchange would allow you to sell the $1 million property and replace it with one or more replacement properties. The total value of the replacement property or multiple properties would have to exceed $1 million. In addition, you would have to hire an exchange company to assist you in the transaction (also known as a qualified intermediary) and would have to comply with certain timing rules relating to when you would have to find a replacement property and close on the purchase of the replacement property.
In general, once you sell your current property, you have 45 days from the date of the sale to designate a replacement property and 180 days from the date of the sale to close on the purchase of the replacement property. While there are limits to these rules, you will need to work closely with an attorney who has ample knowledge of like-kind exchanges and work closely with your exchange company (qualified intermediary).
If you recently inherited the properties, the cost basis for the properties would be their value at the time the owner of the properties died. If you turn around and sell them a short time after inheriting them, you may not owe any federal income or capital gains taxes on the properties.
If you have no federal income taxes to pay, you may also have no state income taxes to pay and you might not need to use a like-kind exchange to achieve your financial goals.
You should talk to a knowledgeable accountant for further information about the specifics of what you’re trying to do.
Now let’s turn to your real estate tax question: You should contact the Orange County Assessor’s or Tax Collector’s office to discuss whether they allow the real estate tax basis from the sale of a property within the county to be transferred to another property within the county.
Most taxing authorities that allow a freeze or incremental increases in the valuation of real estate are eager to have the property sold or transferred to allow them to bring the property’s value up to the current rates. For primary residences, or for seniors of a certain age, some local municipalities may allow a break in taxes when a person moves within the municipality, but it’s less likely for investment and commercial properties.
Copyright 2008 Ilyce R. Glink and Samuel J. Tamkin