recovering property via foreclosure

Mar 01, 2013 1 Replies
R

Taxpayer sells real estate, and takes back a first mortgage. Buyer then defaults,and the taxpayer takes back the real estate via foreclosure.



What are the tax implications of:


  1. taking back a first mortgage. I believe the sale is complete and stands on its own, and the mortgage is treated as a separate transaction.


  1. recovering the property via foreclosure. I believe this is a new acquisition, with the basis being the unpaid principal on the mortgage plus whatever legal and transactional costs that are incurred to accomplish the foreclosure.



Is this correct? any other thoughts?


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S

There is both a mortgage and a note. The mortgage simply secures the note and allows the creditor to have the property sold to satisfy the note if payments are not made on time. In most places a mortgage does not simply allow the creditor to take the house, but the house has to be sold to the highest bidder, and the creditor gets paid up to the amount owed to him.

If the creditor makes what is generally called a full credit bid (bidding the amount owed at the foreclosure sale) and as a result buys the house, when he sells it that is a separate transaction. But the foreclosure sale itself is not.

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