Bill Bronchick

Tax Issues on a Subject 2 Deal
by Bill Bronchick

You buy a property "subject to" an existing loan. You sell the property on an installment land contract or lease/option. What are the tax ramifications?

Part One - Determining Your Basis

Your tax basis is basically what you paid for a property. If you have a seller $2,000 and took a deed subject an existing loan of $189,000, your basis is $191,000. Basically, your basis in a subject to is cash paid to the seller, plus existing loan you are taking over. If you also paid money for back taxes and mortgage payments, that would also be part of your basis. So, if in the above example you paid $3,000 to the lender to cure the back payments, your tax basis is $194,000.

Part Two - Figuring Out Your Gain

If you resell the property for cash, the gain is easy to figure out -sales prices less your basis, less your sales costs (broker fees, closing costs, etc). If you resell the property on a lease/option, you haven't really sold it at all, since a lease/option is generally not considered a sale until the tenant exercises the option to purchase. During the period of the lease, you would be taking depreciation, so there's a recapture of that depreciation when you sell at 25%.

If you resell on an installment land contract (aka "contract for deed"), it IS a sale, even though title does not pass to the buyer. Thus, your gain is the sales price on the contract, less your tax basis. This is considered an "installment sale", so your taxable gain is based on the cash received, plus any principal received in the year of sale. When the buyer pays off the balance of the contract, you have a gain in that tax year for the balance of principal received.

Part Three - The Interest

This part of the equation always gets people confused. In our example above, you bought a property from Sally Seller subject to the existing loan. You then sold it on a land contract to Barney Buyer. Who "owns" the property? For federal income tax purposes, there were two sales - from Sally to you, then from you to Barney. So Barney would be deducting the interest he is paying on schedule "A" of his federal income tax return as the "equitable owner".

This appears confusing because you have the deed and Barney does not. It is also even more weird because Sally Seller's lender is sending a form 1098 for the annual mortgage interest to the IRS in Sally's name! Don't let that fool you... the basic rule of the interest deduction is that the person who has an ownership interest in the property, uses it as his principal residence, and actually makes the interest payments is the one who is entitled to the deduction. So, in this case, Sally Seller neither owns the house nor makes the payments - she does nothing. Barney Buyer is the "equitable owner", which give him an ownership interest. And, Barney is also actually making the interest payments, which he can deduct.

One last part of the equation - the interest you are paying on the underlying loan. If you buy subject to and sell on a wraparound, you are collecting payments from Barney Buyer and continuing to make payments on Sally's underlying loan. The interest you pay is deductible as an offset (business interest) against the interest income you are collecting from Barney Buyer.


Bill Bronchick
William Bronchick, CEO of Legalwiz Publications, is a Nationally-known attorney, author, entrepreneur and speaker. Mr. Bronchick has been practicing law and real estate since 1990, having been involved in over 600 transactions. He has appeared as a guest on numerous radio and television talk shows including CNBC Power Lunch. He has been featured in Who's Who in American Business, Money Magazine, the Los Angeles Times and the Denver Business Journal. William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996.


Bill Bronchick Products (9)
CoursesHow to Create a Bulletproof Corporation
CoursesHow to Create Your Own LLC and Family Limited Partnership
CoursesStep by Step Guide to Land Trusts
CoursesUltimate Guide to Buy and Hold
CoursesUltimate Guide to Fix and Flip
CoursesUltimate Guide to Owner Financing
CoursesUltimate Guide to Wholesaling
SpecialsWealth Protection Library
CoursesWealth Protection Strategies


Copyright Notice
Copyright 2002-2018 All Rights Reserved. Published with Permission of Author. No part of this publication may be copied or reprinted
without the express written permission of the Author and/or REIClub.com.

Back to Top

Free Newsletter
Name:
Email:

Article Options
Printer Friendly Page
Send This to Friend

Author's Articles
10 Easy Tips for Finding Investment Properties
10 Inexpensive Ways to Spruce Up Your Rental or Rehab Property
60 Days To Your First Bargain Purchase
7 Real Estate Contract Buyer Clauses Checklist
7 Reasons to Use a Land Trust
7 Ways To Buy Foreclosure Property
9 Goal Setting Tips For Real Estate Investors
9 Mistakes New Real Estate Investors Make
A Review of the National Consumer Law Center
All About Property Disclosures
Apartment Investing - Investors Now Is the Perfect Time!
Are Real Estate Seminars Worth the Money?
Are You a Newbie at a Real Estate Club?
Are You Clear On What is a Good Deal
Are You Waiting on the Sidelines?
Bankruptcy, Foreclosure, & Credit - How it Affects You
Bankruptcy, Foreclosure, & Credit - Part II
Basics of the Real Estate Contract
Be a Smart Investor... Do the Math
Big Brother Is Watching You, New (Bad) Legislation Coming Your Way
Bubble, Schmubble - Flipping Works in Any Market
Bull vs. Bubble
Bulletproof Your Wealth with Family Limited Partnerships and LLC's
Buy A House - Get Thrown in Jail?
Buying at the Foreclosure Auction
Collecting Money Owed by a Tenant
Common Investor Legal Mistakes
Common Sense Mortgage Tips
Contents of a Good Short Sale Package
Contract for Deed
Create Monthly Cash Flow Without Any of Your Own Money or Credit
Dealing with Real Estate Agents
Dealing with the Dealer Issue
Dealing With the Due on Sale Clause - Part II
Do You Need a License to Flip Real Estate?
Equity Sharing & Partnerships
Essential Contract Clauses
Essential Contract Clauses II
Explaining Foreclosure Options to the Homeowner
Five Big Mistakes Newbies Make
Flipping Properties for Cash Profit
Flipping Versus Holding - Which is Better?
Get That Property Out of Your Name!
Getting Started as a Real Estate Entrepreneur
How Much Cash Should an Investor Keep in Reserve?
How to Create a Real Estate Cash Cow
How to Determine Property Values in Today's Market
How to Get a Hard Money Loan
How to Save Up to 90% on Title Insurance
HUD Properties, FHA & Title Seasoning
Illegal Flipping and Lender Seasoning
Investing in a Changing Market
Investing Outside of Your Local Area
Investing Strategy - Master Lease Option for Apartments
Keep a Positive Perspective in a Negative Market
Know Your Real Estate Laws
Learn the Landlord-Tenant Rules!
Lease Option a Junker!
Lease Option Tips & Strategies
Lease/Option 101
Lease/Option vs. Contract for Deed
Lease/Options & the Equitable Interest
Mortgage Broker vs. Mortgage Banker
Non-Income Verification Loans
Owner Financing Mechanics
Personal Property Trusts
Real Estate Investing Financing 101
Real Estate Investing is Just Like Weight Loss
Reduce Taxes By Investing In Real Estate
Risks of Buying Real Estate in Emerging Markets Out of State
Scripting Common Objections from Foreclosure Sellers
Setting Your Financial Goals
Seven Ways to Flip a Property
Should the Government Bail Out People in Foreclosure?
Should You Disclose on Short Sale Flips?
Should You Do Real Estate Full-Time?
Should You Use an Attorney's Fee Clause?
Tax Issues on a Subject 2 Deal
Tax Lien Investing 101
Ten Myths Preventing People from Succeeding in Real Estate Investing
The Basics of “Short Sales”
The Bona Fide Purchaser
The Ethical Real Estate Investor
The Forgotten Owner Carry
The Mortgage Elimination
The New Limited Liability Company
The Not-So-Handy Man's Guide to Fixing and Flipping Properties
The Property Recording System
The Role of Insurance in Asset Protection Planning
The Wrong Way to Invest in Real Estate
There is No Due on Sale Jail
Top Ten Ways to Get Sued - Guaranteed!
Understanding Loan Terms
Understanding The Mortgage Loan Market
Using A Home Equity Line Of Credit To Buy Properties
Using a LLC IRA for Real Estate Investing
Using Facebook as a Real Estate Investor
Using Trusts for Personal & Business Privacy
What Every Landlord Should Know About Discrimination
What to Do if a Tenant Abandons the Property
What You Need to Ask Before Joining a Coaching Program
Where to Incorporate: The Answer May Surprise You!
You Have to Sell a House to Get it Sold
Zero In On Motivated Sellers


Author's Products

How to Create a Bulletproof Corporation

How to Create Your Own LLC and Family Limited Partnership

Step by Step Guide to Land Trusts

Ultimate Guide to Buy and Hold

Ultimate Guide to Fix and Flip

Ultimate Guide to Owner Financing

Ultimate Guide to Wholesaling

Wealth Protection Library

Wealth Protection Strategies