DEED IN LIEU TAX CONSEQUENCES
Ted Thomas explains the deed in lieu tax consequences. Have you or someone you know gotten one of these before? Are you wondering, how does a deed in lieu affect taxes?
I’m Ted Thomas. I’ve been associated with tax liens and tax deeds for the past 30 years, and I’m going to teach you a lot.
Today I’m talking about deed in lieu tax consequences for those wondering how does a deed in lieu affect my taxes?
What is a deed in lieu? It simply means that someone is going to give a deed back to either a seller or a bank, and if they do that, what’s the tax concern on that?
I’m also going to give you some important details about tax defaulted real estate.
Let me start by saying, I’m not an attorney, CPA, or real estate broker. I’m an entrepreneur and investor just like most of my clients. For 20 years, I’ve been in the trenches and learned a lot. I’ve learned from experience.
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DEED IN LIEU TAX CONSEQUENCES – TAX DEED PROPERTIES
To start with, you can expect that tax deed properties won’t be the cream of the crop. In other words, they’re probably not country club properties. They are slightly used, and some of them are abused. But they are bargains.
What we do is turn them into revenues that others overlook because we buy at tax default property auctions. When we do that, we try to buy for pennies on the dollar.
DEED IN LIEU TAX CONSEQUENCES – TAX LIENS AND DEEDS
The system of tax liens and tax deeds was created by the states and local counties who proceduralize and standardize the collection of taxes, especially delinquent taxes.
This process has been in effect, and has been a huge opportunity, for over 200 years. Operationally, it always works. It works for the state, the county government, and it certainly works for property owners and for all of us, as investors.
It works very well for us because we can get bargain properties. Other than the schools and the churches, most of the property in the USA is taxable.
DEED IN LIEU TAX CONSEQUENCES – PROPERTY TAXES
The legislature has authorized each county treasurer to levy taxes, then collect the tax on each property.
In the event they can’t collect the tax, which the majority of property owners will pay, they can take serious action. They can seize the property.
The majority of property owners will pay their fair share of the taxes. However, a small percentage of property owners won’t have the money, and they will default on the taxes.
If they continue in default, then they will actually forfeit the property to the county. The county will seize and confiscate properties for unpaid property tax. It’s the law in every county and every state.
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DEED IN LIEU TAX CONSEQUENCES – PROFITS AND LOSSES
Now, let’s talk about the question, what are the deed in lieu tax consequences? The question appears to be asking about personal taxes, which are triggered by profits and losses.
Usually a deed in lieu is used when you’re giving property back to a seller or you’re giving a property back to a bank. What you’re trying to do is you’re trying to prevent going through the big foreclosure mess that happens.
You are willing to transfer the property back to the bank or whoever is causing the lawsuit, rather than go through the ugly process of seizure, or foreclosure and a civil lawsuit.
Everything is recorded at the county records. That means losses are recorded as well as profits. Keep in mind, profits are taxable. Losses, to a certain extent, are deductible from profits. There can be deed in lieu tax consequences.
This is not only complex, but requires a CPA, and more than likely an attorney that is trained in IRS law and state revenue codes, because you’re asking to transfer a property under not very good conditions.
For the parties who lose property to the county because the property is tax defaulted, the property may have been purchased at a very low price.
Even though the property is lost to the treasurer, it may trigger a profit. If that’s the case, taxes will have to be paid.
DEED IN LIEU TAX CONSEQUENCES – AN EXAMPLE
Allow me to give you an example to simplify this. Deed in lieu is passing a property of a person back to a bank or to the county, so the person doesn’t have to go through the foreclosure process.
For example, a bank or lender loans money on real estate. This happens every day, but in an instance of a homeowner defaulting on that loan, the bank could ask the homeowner to give them a deed in lieu rather than do the foreclosure.
All we’re talking about here is the bank asking for a deed in lieu so that they don’t have to spend the legal fees or the time to do the foreclosure.
DEED IN LIEU TAX CONSEQUENCES FOR SELLERS
When you buy a tax defaulted property, you’re going to sell the property yourself, or you’re going to sell it to someone else who’s going to do that.
If you sell a property yourself, some of your buyers may not pay you. If they don’t pay you, then they might want to just give you the deed and give you the property back. That’s called a deed in lieu of you foreclosing because they couldn’t pay.
It’s a deed in lieu of going through the legal process of foreclosing. If this happens to you, it’s an easy process. You just tell them, “Give me a deed in lieu,” you get your property back, and then you can resell it.
How does that affect the taxes? What are the deed in lieu tax consequences? On both sides, it has some effect.
I’m not a CPA. I’m not an accountant, so I can’t give you tax advice. However, I’m telling you if someone makes money, they are going to have to pay taxes.
The people losing the property are probably losing money, so they probably have a loss that they can take. I can’t give you a direction on that.
DEED IN LIEU TAX CONSEQUENCES – WHY BUYERS WILL DO THIS
Many people prefer a deed in lieu of foreclosure rather than having their name published in the newspaper and a sign put on their front door or lawn.
What we’re talking about is the homeowner giving up the deed to the property, rather than go through a foreclosure.
There’s nothing sneaky happening here. It’s all aboveboard. People that don’t pay their mortgage lose properties this way all the time.
In closing you’ll need a title company and a CPA to make sure you’re doing the right thing.
We hope you enjoyed Ted’s lesson on deed in lieu tax consequences.
A lot of bargain real estate investors sell their properties themselves. They pick up these properties for pennies on the dollar at tax defaulted property auctions and either sell the property outright or sell on an installment plan.
When they sell the property themselves, they may encounter a buyer who doesn’t pay. An easy way to avoid foreclosure is to just have the buyer give the property back with a deed in lieu of foreclosing.
This can have tax ramifications that all boils down to whether there was a profit or a loss. Just be aware that there can be deed in lieu tax consequences, and you should speak to a tax professional about it.
If you’d like to know more, Ted Thomas can show you how to make big profits in deep discount real estate.
For over 25 years, Ted’s been teaching students the secrets, strategies, and safest ways to profit from investing in tax delinquent property.
There’s no one more qualified than Ted, America’s leading authority on tax lien certificates and tax defaulted property investing, to show you how.
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