HUD 1 Line 503

Littlefoo profile photo

Hey Gang:
I have this question that has been eating me for the last ten minutes....yea..I'm anal. On the HUD closing statement, line 503... house taken subject 2. This allows the seller to get a loan in the future, or so I have read on this messege board. My question is this. Is taking subject 2 a form of seller carryback? Afterall, the seller is in a way financing his home to the investor at zero percent interest. It's almost as if sub 2 is a reverse contract for deed.Seller carryback is a taxable event, according to the IRS. I think that I already know the answer, but I just want to hear it from the experts!!
Thanks
Kerry

Comments(3)

  • rajwarrior18th April, 2004

    Ding ding ding, Bingo, Game-over, We have a winner!

    Yes, you are correct, Subject to is simply another form of owner financing. The only difference in subject to is that in most cases, there is no offical contacts/agreements (ie notes/liens/mortgages) between the buyer and the seller save for the original loan documents and the details of the purchase and sale agreement.

    Whether the seller's lender views it as an outright sale or a glorified rental really makes no difference. Since the old house payment is being made it's basically a wash for the seller's DTI ratio.

    Your hung up on this "taxable event" thing, why? As I said before, most sellers will qualify for the tax exempt status of selling their personal home,and if not, most would be aware of the tax consequences of selling. Let them worry about the taxes, not you. You'll have plenty of your own tax problems to figure out, trust me.

    Roger

  • Littlefoo18th April, 2004

    Your hung up on this "taxable event" thing, why? As I said before, most sellers will qualify for the tax exempt status of selling their personal home,and if not, most would be aware of the tax consequences of selling. Let them worry about the taxes, not you. You'll have plenty of your own tax problems to figure out, trust me.

    Roger




    Roger: If you don't mind... I ran out of toliet paper today!! LOL Why would the seller be possibly tax exempt?
    Taking sub 2 are they really selling or are they deeding the property? Finally... that last statement..let them worry about the taxes..not you. Many of these sellers are under stress and trying to get out of a bad situation....don't we as ethical investors have the obligation to inform them of what will happen to them if we don't help them.... tax consequences ect..and all?
    For a contract to be valid, there must be three things.
    1) Meeting of the minds. ( Talking)
    2) Consideration.... ( money)
    3) acceptence... a signed something.

    I have always wondered and still do think about a seller selling, deeding, under duress..( a stressful situation)
    Finally. In your expertise, would you put a statement in the paperwork that the owner " May" have a tax liability later on when we the investor finally cashes out his/her/sellers mortgage note?
    Thanks to you almighty one for your tootoledge!!
    Kerry
    [addsig]

  • rajwarrior18th April, 2004

    Most homeowners can sell their home "tax exempt" because a few years ago former President Clinton enacted a new law that says that if the seller has lived in and owned for 2 out of the last 5 years the property being sold then any profit up to $250K (or $500K if married) is not taxable.

    In a subject to loan transaction, you, as the investor, are actually buying the property. You will get the deed in your name at closing. If the sale will be a taxable event for the seller, then in most cases, the seller will already know that, but if you'd feel better informing them of it, go ahead.

    Many of these sellers are under stress and trying to get out of a bad situation
    That's not necessarily true. Many sellers aren't under any duress to sell. Many just want to sell to you due to a time constaint, job change, lack of equity, found another "dream home," etc, etc.


    I have always wondered and still do think about a seller selling, deeding, under duress
    I'm assuming that you mean a seller facing foreclosure. Yes, it's remotely possible that a seller in that situation may try to sue you to get their house back. However if you've acted in a professional and ethical manner, they likely wouldn't win, and in 99% of the case, you'll be viewed as a hero in their eyes. Also, it's doubtful that you will be their only "hope" so to speak. As soon as the foreclosure notice is filed, the homeowners will get swamped with letters/phone calls from other investors offering to "save them." If the sellers contacted you, then you where the best deal of the bunch. Hardly a "duress" situation.

    No, I would not put that in my paperwork, but it's always best to review it with your attorney if you're worried about it.

    Roger

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