Basis and "At-risk"

Posted by Tyler Franks on September 17, 2009, 6:41 pm

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1) If two people, A and B, own a house (both on the title) that they
purchased for $150,000, each having put in $20,000 cash and A (but not B)
having signed a mortgage for the balance (110,000), then what is each of
their basis in the house?

2) If they then form a partnership (LLC if it matters) and transfer the
house deed to the partnership, what is each of their amount "at Risk" for
the partnership interest, and how does the liability stand (recourse or non
recourse) to each partner? "A" still remains the named lendee on the
mortgage, ie the loan did not change at all on the transfer.

Errata: If it matters, the house becomes a rental property, no other cash
is put in at this point, but if it ever is, it will be put in equally
between the partners. Profits and losses are 50-50. We do understand that
a transfer of the asset to a new name can trigger the "due on sale" clause
of the mortgage, but it would seem that that is a very rare occurence, so we
assume that risk to maintain the lower interest rate. Hypothetically of
course.

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Posted by Arthur Kamlet on September 17, 2009, 6:57 pm

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>1) If two people, A and B, own a house (both on the title) that they

>purchased for $150,000, each having put in $20,000 cash and A (but not B)

>having signed a mortgage for the balance (110,000), then what is each of

>their basis in the house?

I assume they are not married to each other?

The basis of the house is 150,000, and the amount of the mortgage
is a red herring.

The individual basis of each taxpayer is determined by the
partnership agreement. In theory the partnership agreement
can be oral, but that just creates all sorts of problems and
some states may not recognize such an agreement for real estate.

So if there is no written partnership agreement, it would behoove
them to draw one up.

Note: I am arguing they have probably entered into a partnership
even if there's nothing in writing, even if there's no formal
papers filed with local officials.

>2) If they then form a partnership (LLC if it matters) and transfer the

>house deed to the partnership, what is each of their amount "at Risk" for

>the partnership interest, and how does the liability stand (recourse or non

>recourse) to each partner? "A" still remains the named lendee on the

>mortgage, ie the loan did not change at all on the transfer.

Draw up a written partnership agreement.

Recourse is governed by the mortgage agreement and their
own partnership agreement. The mortgage agreement is
governed by state law as to whether recourse is allowed.

>Errata: If it matters, the house becomes a rental property, no other cash

>is put in at this point, but if it ever is, it will be put in equally

>between the partners. Profits and losses are 50-50. We do understand that

>a transfer of the asset to a new name can trigger the "due on sale" clause

>of the mortgage, but it would seem that that is a very rare occurence, so we

>assume that risk to maintain the lower interest rate. Hypothetically of

>course.

The basis for retal opurposes, if no money is placed into the
property, is the lower if original basis or FMV on date it is placed
into rental service.

I am concerned by the nature of these questions, and would suggest
seeking professional tax and legal assistance.
--

ArtKamlet at a o l dot c o m Columbus OH K2PZH

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Posted by Stuart A. Bronstein on September 17, 2009, 7:05 pm

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> 1) If two people, A and B, own a house (both on the title) that

> they purchased for $150,000, each having put in $20,000 cash and

> A (but not B) having signed a mortgage for the balance

> (110,000), then what is each of their basis in the house?

Each has a $75,000 basis in his half.

> 2) If they then form a partnership (LLC if it matters) and

> transfer the house deed to the partnership, what is each of

> their amount "at Risk" for the partnership interest, and how

> does the liability stand (recourse or non recourse) to each

> partner? "A" still remains the named lendee on the mortgage, ie

> the loan did not change at all on the transfer.

Forming an LLC will not shield them from liability from a debt
entered into previously by them personally.

> Errata: If it matters, the house becomes a rental property, no

> other cash is put in at this point, but if it ever is, it will

> be put in equally between the partners. Profits and losses are

> 50-50. We do understand that a transfer of the asset to a new

> name can trigger the "due on sale" clause of the mortgage, but

> it would seem that that is a very rare occurence, so we assume

> that risk to maintain the lower interest rate. Hypothetically

> of course.

Generally if you transfer mortgaged property to a business entity
completely owed by the previous owners (e.g. corporation, LLC or
trust) there is often either an exemption or the creditor doesn't
have a problem with the transaction because the true ownership
didn't really change.

--
Stu
http://downtoearthlawyer.com

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Posted by Tyler Franks on September 19, 2009, 7:09 pm

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"Stuart A. Bronstein" wrote in message

>> 1) If two people, A and B, own a house (both on the title) that

>> they purchased for $150,000, each having put in $20,000 cash and

>> A (but not B) having signed a mortgage for the balance

>> (110,000), then what is each of their basis in the house?

> Each has a $75,000 basis in his half.

This has been bothering me a little. Doesn't A effectively pay $130,000 and
therefore have that as a basis and B have a $20,000 Basis? How A got the
funds seems moot. Not discussing the partnership aspect yet, just basis for
tax purposes.

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Posted by Stuart A. Bronstein on September 21, 2009, 3:09 pm

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> "Stuart A. Bronstein" wrote

>>> 1) If two people, A and B, own a house (both on the title)

>>> that they purchased for $150,000, each having put in $20,000

>>> cash and A (but not B) having signed a mortgage for the

>>> balance (110,000), then what is each of their basis in the

>>> house?

>> Each has a $75,000 basis in his half.

> This has been bothering me a little. Doesn't A effectively pay

> $130,000 and therefore have that as a basis and B have a $20,000

> Basis? How A got the funds seems moot. Not discussing the

> partnership aspect yet, just basis for tax purposes.

Interesting. It could be structured that way, but it would have to
be in the partnership agreement that A is the owner of almost 87%
and B is the owner of the remaining 13%. Otherwise the presumption
is 50% ownership by each.

Only one owner signing a mortgage is highly unlikely. A lender
would generally not agree to that kind of situation, because it
would make foreclosure more difficult.

If the second person became an owner after the first person
purchased, the mortgage still is on the entire house, and it
appears (without additional evidence to the contrary) that the
second person is buying a half interest.

--
Stu
http://downtoearthlawyer.com

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