The right date is critical in many things. Here we are talking about the filing date on a real estate transaction – a mortgage donation.
Here’s the situation. You own a junior (2nd, 3rd, etc.) mortgage on a real estate property you sold. The buyer has fallen on hard times. The first mortgage holder (probably a bank) has filed foreclosure action and a court date is set. To make it worse, the property is worthless and broken down. In other words, your worthless mortgage will be gone soon with no cash out for you.
Here’s your options:
- Do nothing and on the court date you get nothing for your worthless mortgage except the opportunity to write it off as a bad debt.
- Bid enough to pay off all the underlying mortgages so you end up buying the property.
- Sell the mortgage to someone else.
- Donate the mortgage to a charity.
Here’s the consequences of your above choices.
- Write it off as a bad debt. The IRS limits you to a maximum of $3,000 per year until the total is written off. Each year you write it off your actual refund is based on your then current tax bracket. In other words, if it’s a $60,000 worthless mortgage it will take 20 years to cash it out. If you’re in a high tax bracket, that’s okay. But if you retire and drop to a lower tax bracket you get far less cash out for a worthless mortgage.
- You end up paying cash to take back title to a property you can only lose money on.
- Great if you can find someone, but not likely.
- The IRS rule says between 20% and 50% of your adjusted gross income can be a donation deduction. That means if you make more than $15,000 (= $3,000 / 20%) you get a higher write off and finish it much earlier.
Let’s put some numbers and time to the choices. If you earn less than $84,000 your tax bracket is 22%. Up to $160,000 is only 2% more.
- $3,000 x 22% = $660 refund each year for 20 years x 20 years = $13,200 total at the end of 20 years.
- Not a good choice.
- Will anyone actually pay you for a mortgage already in foreclosure?
- $84,000 annual income x 20% = $16,800 you can write off each year. $16,800 x 22% = $3,696 refund the first year. Again in years 2, 3, and 4. Your sped up the process to cash out of a worthless mortgage.
Victims Relief, Inc. doesn’t have any magic way to convert a worthless mortgage into cash, We do charge a $1,000 processing fee so in the end you get all your refund within 4 years instead of 20 years minus the $1,000.
Is the cost worth the speed of return? You be the judge.