Advice needed on tax consequences of the sale of 2nd home at a loss (mortgage companies, mortgage)

[somejoe]

Hi,

I live and own a house in CA. A couple of my friends who live in Texas got into construction business as a secondary job in 2007. They were doing all their construction business under a LLC company. Around that time I decided to invest some savings in their business, but they instead advised me to buy a property that had recently come up for sale. The idea was that in a few months after my purchase of the property, their LLC will acquire it from me, demolish the old dwelling and subsequently build a new dwelling and sell it for profit. Also, the plan included eventually converting my equity in the purchased property into an equity ownership in their LLC after they acquire the property from me. The LLC couldn't buy the property directly because it had already used up the line-of-credit it obtained from the banks on a couple of other similar properties which were previously purchased and are very close to being ready to be sold for a profit. This whole arrangement was off-records and solely based on mutual trust.

Anyway, unfortunately after I purchased the home, the real estate market tanked, small builders like my friend's LLC stopped getting construction loans from banks, resulting in me holding onto the property. I continued owning the property for the next 3 years, making all the mortgage payments and the associated property taxes and utilities etc.

For a period of about 18 months during this time, my friends paid me rent on this property although they never lived there. The rent payment exactly matched the mortgage payments for that period.

Finally, we sold the property a couple of months ago in August 2010 at a huge loss. The sale price was about $172K less than what we owed the mortgage companies. My friends wired $140K to the escrow account and I covered the rest to complete the sale.

The understanding between us three friends was that we will split all loses between us equally. Since I made a big down payment during the initial purchase, and paid almost 18 months of mortgage payments and 3 years of property tax payments, they still owe me some more money which they plan to pay me back over time.

My question now is:

1. How will I account for this transaction with tax agencies?
2. Will IRS come after me for not reporting the $140K which my friends wired to the escrow account as income?

Any advice in this matter will be much appreciated.

Thanks

[rjrcm]

You need to consult with a tax accountant.

My opinion FWIW, the $140K "gift" is taxable and opens you and your friends to action by the IRS if taxes not accounted for. There may be some qualifying exemptions to reduce the tax:

http://www.irs.gov/businesses/small/...108139,00.html

I don't see how your friends can share in the loss since they didn't own the property.

[Touchette]

Originally Posted by rjrcm

You need to consult with a tax accountant.

My opinion FWIW, the $140K "gift" is taxable and opens you and your friends to action by the IRS if taxes not accounted for. There may be some qualifying exemptions to reduce the tax:

Frequently Asked Questions on Gift Taxes

I don't see how your friends can share in the loss since they didn't own the property.

What rjrcm said. Talk to an accountant specializing in taxes and do your due diligence to make sure they have experience with all of the issues you're dealing with.

This would have been much easier if you guys had wrote up the proper contracts and did this the right way from the beginning. In the future I suggest doing that, because now someone is probably going to get screwed. Sorry to be so direct, but that's just the way it is.