Are You Legally Liable for Your Subject-to Deals?

Jan 05, 2010 Comments Off on Are You Legally Liable for Your Subject-to Deals? by

This is really two articles in one and it is one of the most controversial ones. Plus…Subject 2 Deals – How Can You Deduct the Mortgage Interest?

A frequent question about subject-to deals is in regard to the mortgage interest. Is it deductible? Another question is; “Should I complete a IRS SS4 for the Land Trust to obtain a FEIN and then inform the lender to change the SSN to the FEIN for the Land Trust?”

So can you deduct the interest?

The IRS says:

You can deduct interest on a debt only if you meet all the following requirements.

1. You are legally liable for that debt.
2. Both you and the lender intend that the debt be repaid.
3. You and the lender have a true debtor-creditor relationship.

Mortgage. Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible.

Are you legally liable for Subject-To Deals?

Even though some experts tell us that we are not liable for the debt of a ‘subject2’ deal, try telling that to a judge. The CYA does not release you from liability of the paying the mortgage from the court’s perspective. Just ask the investor in NC that didn’t make the mortgage payments after he took several deals subject-to the existing mortgage and was unable to make the payments.

Relying on a document to save your assets is not good enough from the judge or jury’s perspective. Subject-to actually means:

“An indication that title to a property includes an obligation of some sort.” The obligation is to informally assume the debt plus any other items like easements, judgments or restrictions.

While the debt is not formally assumed and the lender will not hold you liable, the original borrower (debtor) may and probably will. Just ask those investors or should I say ex-investors that didn’t make the payments.

If you have been following the news, the borrowers have started going after the investors that accepted the obligation to make the payments. Some were tapped on the shoulder by the Attorney General in their state and others received summons to appear in civil court.

Are you unsure if you would be liable?

Then buy a house ‘subject to’ and fail to make the payments.

See what happens, more than likely you’ll receive summons for Court or a call from the Attorney General. How does this look to outsiders when you take over a house but fail to make the payments? It appears that you’re assuming their responsibility to pay the mortgage which is correct and you chose not to fulfill your obligation.

The gurus perspective is that the “lender” cannot foreclose or collect the debt from you or entity – however, the owner can.

Remember your the implications of your words, implied intent and how this deal appears to the judge carries the majority of weight. Therefore, if you told the homeowner you would make the payments and then fail to do so, watch out.
Oh, but you say “I didn’t say that. I told the homeowner, ‘I would make your payments before/if/when/maybe/….”

It doesn’t matter what you say after that.. the homeowner will only hear, “I’ll make your payments”.

When you buy a property subject2 you are responsible – technically. Do you really think a judge will look at your CYA paperwork and say,

“Wait… I see you’re not responsible because of your CYA (Seller’s Disclosure). By the way, that was a well drafted document.”

I doubt it.

One attorney in Atlanta that closes a subject-to transactions all the time will tell the homeowners, “If they don’t make the payments, sue them to get the house back”. He’s right.

So yes, you are legally liable. Or least you want to be if you plan on deducting the mortgage interest.

Back to the Mortgage Interest Deduction

The Seller could not take the mortgage interest deduct except for the portion they paid while they owned the property. They are not allowed to deduct the interest they didn’t pay.

You are allowed the deduction.

— More next week on subject-to deals and the liability involved.

Financing Strategies

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