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

[avromie7]

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

The example is not perfect, but in that case, he borrowed 21M when he refinanced the property.

[dm123]

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?

His basis is 10MM, since every flip he 1031'd the gains.

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

not sure what your math is meant to be here? Basis is 10MM, FMV is 20MM, Loan is 21MM is what I understood.

[yuneeq]

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

If he refi'd for 21m and sells for 18m, he would need to pay back the bank 3 million, plus the taxes still owed for 8m worth of profit. His basis was 10m so everything above that is profit.

[haltkup]

If he refi'd for 21m and sells for 18m, he would need to pay back the bank 3 million, plus the taxes still owed for 8m worth of profit. His basis was 10m so everything above that is profit.

question: assuming its foreclosed at an 18M evaluation and 3M is written off by the lender,  is he now liable for tax on 3M gain, in addition to the 8M in capital gains?

[yuneeq]

question: assuming its foreclosed at an 18M evaluation and 3M is written off by the lender,  is he now liable for tax on 3M gain, in addition to the 8M in capital gains?

According to ChatGPT, if it forecloses it gets valued at the value of the loan. So if the refi was for 21m, the value for tax purposes will be 21m, even if the bank writes off 3m and values it at 18m for Fair market value. So regardless how its viewed, he owes the taxes on 11m.

[EliJelly]

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%.

Much worse than that, he would have to come up with millions even without buying the old 3% rate, just for the new 7% interest rate he would need several millions out of his pocket when he's forced to refinance, to be able to hold on to his property.

Lets say the property's cash flow enabled him to make payments of $90k monthly, at the time when the rates were 3% that would cover a loan of $21M, which the bank gladly lent him as the property's performance made sense for that amount. Now that the rates went up to 7% and the guy is due for a refi, even if the property's monthly cash flow increased lets say to $120k with the rising rents, he'd only be eligible for a $18m loan with the new rates, forcing him to come up with another $3m out of his pocket to avoid foreclosure. 

[Ver hut gazugt]

Much worse than that, he would have to come up with millions even without buying the old 3% rate, just for the new 7% interest rate he would need several millions out of his pocket when he's forced to refinance, to be able to hold on to his property.

Lets say the property's cash flow enables him to make payments of $90k monthly, at the time when the rates were 3% that would cover a loan of $21M, which the bank gladly lent him as the property's performance made sense for that amount. Now that the rates went up to 7% and the guy is due for a refi, even if the property's monthly cash flow increased lets say to $120k with the rising rents, he'd only be eligible for a $18m loan with the new rates, forcing him to come up with another $3m out of his pocket to avoid foreclosure.

Would his principal not come down if he was paying 90k/m for 5 years?

[EliJelly]

Would his principal not come down if he was paying 90k/m for 5 years?

Slightly, most goes towards interest. If the cash flow increased tremendously then it can be a closer call but of course that's not always the case.

[yuneeq]

Slightly, most goes towards interest. If the cash flow increased tremendously then it can be a closer call but of course that's not always the case.

Also many take out interest-only loans to save on monthly payments, with plans to refi after 3-5 years.

[Yef]

His basis is 10MM, since every flip he 1031'd the gains.
not sure what your math is meant to be here? Basis is 10MM, FMV is 20MM, Loan is 21MM is what I understood.

I was looking at the second scenario quotes, where he only financed 15mil

[dm123]

I was looking at the second scenario quotes, where he only financed 15mil

Are you referring to the quote below? Where do you see a second scenario? You mean if he would stop after putting the money into the 15MM property and not refi at 21MM?

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.

[aygart]

According to ChatGPT, if it forecloses it gets valued at the value of the loan. So if the refi was for 21m, the value for tax purposes will be 21m, even if the bank writes off 3m and values it at 18m for Fair market value. So regardless how its viewed, he owes the taxes on 11m.

https://apps.irs.gov/app/vita/content/36/36_03_050.jsp?level=advanced

Foreclosures and Capital Gain or Loss

If a taxpayer does not make payments owed on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which the taxpayer may realize gain or loss. This is true even if the taxpayer voluntarily returns the property to the lender.

Figure the gain or loss from a foreclosure or repossession the same way as the gain or loss from a sale. The gain is the difference between the amount realized and the adjusted basis of the transferred property (amount realized minus adjusted basis). The loss is the difference between the adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized).

[bochur22]

Anyone who has the head to follow this probably already does "independent auditing in our communities"

[Yef]

This should be simpler to understand:

This one

[elimmm]

Anyone who has the head to follow this probably already does "independent auditing in our communities"

or invested with some successful "real estate guy" and is scratching his head now

[aygart]

The taxes are not from the original exchange. The taxes are from having realized proceeds from the foreclosure. That the money came from a 1031 likely means a lower basis, but either way many properties have a low or negative basis compared to the loan amount if they took depreciation or did a cash out refinance.

[aygart]

Anyone who has the head to follow this probably already does "independent auditing in our communities"

My understanding is that this guy is due to an independent audit.

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

[elimmm]

My understanding is that this guy is due to an independent audit.

what does "skipping town" mean? There are investors and properties that will chase him

[aygart]

what does "skipping town" mean? There are investors and properties that will chase him

Your question is what he expects to benefit? He is embarrassed to show his face. I don't think he is in a top secret location.

[dm123]

This one

Ah got it. Thanks for clarifying.