Time for some proper due diligence/ independent auditing in our communities

[yoohoo]

Hearing rumors about a real estate guy who just skipped town.

what’s a “real estate guy”?

[Shmobaum]

Hearing rumors about a real estate guy who just skipped town.

Town of Lakewood?

[AsherO]

what’s a “real estate guy”?

It’s the contemporary shmattah business

[liosac]

Hearing rumors about a real estate guy who just skipped town.

One of the biggest sources of RE income in the last few years, the ATM machine AKA as refinancing is done, rate caps are exploding, and investor capital and appetite for risk is diminishing. You are left with a tale of two cities. Those who bought long enough ago to have decent equity and have 7 year loans that aren’t due for a while can ride it out and ignore the paper loses for the meantime. Rents are still healthy and can probably cover increasing insurance and tax costs. Those who took out bridge loans and are facing a hard deadline with numbers that don’t make sense in the next 6-12 months are in for a rough ride. If the holding represents unrealized tax liabilities in the form of a 1031 exchange they are really stuck between a rock and a hard place.

[elimmm]

If the holding represents unrealized tax liabilities in the form of a 1031 exchange they are really stuck between a rock and a hard place.

can u elaborate for the uneducated?

[Euclid]

can u elaborate for the uneducated?

They can't sell because then they'll owe a lot of money to Uncle Sam. And they can't flip it for another property for 1031 since the cap rates are so high

[liosac]

can u elaborate for the uneducated?

To simplify let’s say a guy purchased a property for 10 mil and sold it for 13. He does a 1031and puts the 3 million in profit into a new property which defers his tax liability on the profits. He sells the next property at a 3 million profit and puts the 6 million in 1031 money into a 15 million dollar property. The building appreciates, as almost all did in the past few years, and he refis for 21 million, pulling his entire initial investment out in cash. Things are going great. Now he has a loan at 3% that comes due this year. Rates have now jumped to over 6%. If he has to do a fire sale his property will fetch maybe 20 in todays market. He will actually have to pay in cash to make the sale AND come up with a 1031 property that actually makes sense in todays market to avoid millions in tax liability. If he just turns in the keys and walks away his 6 million in 1031 is now a tax liability in the millions, money he spent long ago. To hold on to his property he  would have to come up with millions in new cash to buy a new rate cap at 3%. Unfortunately this scenario is going to become more common in the next year or two as loans come due unless rates tank.

[Alexsei]

And what could he have done otherwise to avoid the situation?

[knowitall]

And what could he have done otherwise to avoid the situation?

Ummm…. Maybe having some common sense in 2021/2022?

[liosac]

And what could he have done otherwise to avoid the situation?

Put some of that 6 million he took out in an account to cover future taxes instead of blowing it on excesses?

[avromie7]

To simplify let’s say a guy purchased a property for 10 mil and sold it for 13. He does a 1031and puts the 3 million in profit into a new property which defers his tax liability on the profits. He sells the next property at a 3 million profit and puts the 6 million in 1031 money into a 15 million dollar property. The building appreciates, as almost all did in the past few years, and he refis for 21 million, pulling his entire initial investment out in cash. Things are going great. Now he has a loan at 3% that comes due this year. Rates have now jumped to over 6%. If he has to do a fire sale his property will fetch maybe 20 in todays market. He will actually have to pay in cash to make the sale AND come up with a 1031 property that actually makes sense in todays market to avoid millions in tax liability. If he just turns in the keys and walks away his 6 million in 1031 is now a tax liability in the millions, money he spent long ago. To hold on to his property he  would have to come up with millions in new cash to buy a new rate cap at 3%. Unfortunately this scenario is going to become more common in the next year or two as loans come due unless rates tank.

This is the only part I don't understand, why is there a tax liability? If he hands in the keys he writes off the 6M as a loss, so there shouldn't be any tax liability.

[yuneeq]

This should be simpler to understand:

[yelped]

This should be simpler to understand:

Still doesn't answer the question. Why does one owe taxes if at the end the accumulated and deferred "profit" turned out to be a loss?

[dm123]

This is the only part I don't understand, why is there a tax liability? If he hands in the keys he writes off the 6M as a loss, so there shouldn't be any tax liability.

Still doesn't answer the question. Why does one owe taxes if at the end the accumulated and deferred "profit" turned out to be a loss?

Where do you see a tax loss? Aside from the 1MM due on the loan (and even that may not be collectible) where do you see any loss if he walks away from the property?



I believe the IRS treats foreclosure/abandonment as a sale:

If you transfer the ownership of the secured property to the lender (such as in a foreclosure) or abandon the property, the law may require you to treat the transfer or the abandonment as a sale of the property.
...
If your property was subject to a debt for which you're personally liable (recourse debt), your amount realized is the FMV of the property. If your property was subject to a debt for which you're not personally liable (nonrecourse debt), your amount realized is the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property you received.

[liosac]

This is the only part I don't understand, why is there a tax liability? If he hands in the keys he writes off the 6M as a loss, so there shouldn't be any tax liability.

In this scenario when he refied previously he pulled out 6 million and spent it. When he turns over the keys he shows a loss of $0 on the property. Many if not most RE guys were living off refi money to a large degree over the last few years. That’s an unrecognized tax liability that they assumed would never come due because of course real estate just keeps going up so you can buy, value add, refi/ sell and do 1031 into new property forever. That party is over for now.

[yuneeq]

Still doesn't answer the question. Why does one owe taxes if at the end the accumulated and deferred "profit" turned out to be a loss?

(Chat GPT) In the event of a foreclosure, the tax implications can be complex and depend on several factors, including whether the mortgage is recourse (the lender can pursue the borrower for the difference between the loan balance and the foreclosure sale price) or nonrecourse (the lender's only recourse is to repossess the property and sell it to recoup their losses).

Generally, for tax purposes, the amount realized from a foreclosure is considered to be the fair market value of the property at the time of the foreclosure, plus any debt relief the borrower receives. This amount is compared to the property's adjusted basis to determine if there's a gain or loss.

If the mortgage is nonrecourse, the entire amount of the loan is considered to be the amount realized, even if the fair market value of the property is less than the loan balance. This could result in a taxable gain.

In the case of a 1031 exchange, if the property is foreclosed upon before the investor sells it, the foreclosure is treated as a sale, and the deferred taxes from the original exchange would be due. The amount of the tax would depend on the amount realized from the foreclosure and the property's adjusted basis.

[yelped]

(Chat GPT) In the event of a foreclosure, the tax implications can be complex and depend on several factors, including whether the mortgage is recourse (the lender can pursue the borrower for the difference between the loan balance and the foreclosure sale price) or nonrecourse (the lender's only recourse is to repossess the property and sell it to recoup their losses).

Generally, for tax purposes, the amount realized from a foreclosure is considered to be the fair market value of the property at the time of the foreclosure, plus any debt relief the borrower receives. This amount is compared to the property's adjusted basis to determine if there's a gain or loss.

If the mortgage is nonrecourse, the entire amount of the loan is considered to be the amount realized, even if the fair market value of the property is less than the loan balance. This could result in a taxable gain.

In the case of a 1031 exchange, if the property is foreclosed upon before the investor sells it, the foreclosure is treated as a sale, and the deferred taxes from the original exchange would be due. The amount of the tax would depend on the amount realized from the foreclosure and the property's adjusted basis.

And if the property is worth less than the amount he bought it for, how would he still owe taxes on that? I don't see where any of you addressed that?

[dm123]

And if the property is worth less than the amount he bought it for, how would he still owe taxes on that? I don't see where any of you addressed that?

Where is it worth less than he bought it for? he bought it for "10" and "sold" it for 20 in the case we're discussing, no?

[yelped]

Where is it worth less than he bought it for? he bought it for "10" and "sold" it for 20 in the case we're discussing, no?

Didn't you say he kept on flipping his property until he bought one for $21 million and couldn't keep up with the rates and had to foreclose at a value of $20 million?

[Yef]

Why can’t he sell property for 18 mil(it is supposedly worth 20 mil). 2 mil for taxes, 1 mil in his pocket?