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biophase

Senior Member
Registered: 06/24/06
Posts: 335
Reply with quote  #1 
What happens when you inherit a piece of real estate that is upside down?  If someone passes away and leaves you their home that is worth less than the mortgage what are your choices?

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brycewheeler

Senior Member
Registered: 03/09/09
Posts: 439
Reply with quote  #2 
The person who inherits the real property takes the property valued at "date of death" market value.    The heir will have to make his or her decision as to what to do with the property based on the date of death market value.  An inheritance tax appraiser has to approve or decide, the market value at date of death, as part of the probate court proceedings.

Up until the recent past, heirs got a break because the real property typically was worth much more on date of death, and these new heirs got a new "stepped-up cost basis" on the property for computing in the future, any profit when the property was sold.  Thus even though mom or dad paid on $50,000 for the house and at death its market value was $ 500,000, the new heirs got the property valued at $500,000.  So if they decided to sell it in a year for $ 600,000, they only had to pay capital gains taxes, if any, based on $100,000 profit (not $550,000 profit) because they got the property at the "stepped up (cost)basis" of $500,000.

Now the problems may be different especially if there is a mortgage(s) on the property which may be sliding down in value.

Bryce


brycewheeler

Senior Member
Registered: 03/09/09
Posts: 439
Reply with quote  #3 
Once the date of death market value is determined in probate by the Inheritance Tax Referee (Appraiser), and it is upside down, you can take that value to the bank as good, hard evidence to either get the mortgage modified, or alternatively, get the mortgage reduced in a "short-sale" if the heirs decide to sell, which many, if not most, would normally do.  And, in a short sale, if the market keeps going down, the bank may even reduce the mortgage debt well below the market price.

Bryce
brycewheeler

Senior Member
Registered: 03/09/09
Posts: 439
Reply with quote  #4 
I should also mention that, in my experience, when the executor or the executor's attorney submits the initial summary of assets to the Inheritance Tax Referee, and places a reasonable, but very self-serving (in this case LOW) date-of-death market value, the Referee usually goes along with the recommended date of death market value, especially if it is supported with accompanying written substantiation as to the continuing declining market value, "comps" (comparative values) on similar recent sales (foreclosures) in the neighborhood and nearby areas for similar properties.

Thus, the heir, through their Executor or attorney for the Executor, can exercise a strong influence on valueing the property low, and can use that as very strong evidence with the bank to lower the mortgage debt.   Otherwise the bank knows that the heirs can easily just walk away from the property, leaving the Bank with another long-term headache, another "wasting" asset. 

As part of the Executors strategy in dealing with the bank, it will also depend upon whether the Estate of the deceased contains significant other valuable assets.  If the house is the only real asset of substance, the Executor can take a much tougher position in negotiating with the bank to drastically lower the mortgage.  On the other hand, Banks don't always respond to normal logic these days in their dealing with short sales, mortgages etc., so its hard to predict with any reliability what a Bank will do with any exactness.  But  it is certainly worth a good try to see if something can be salvaged, even if it may look upside down.

Bryce


biophase

Senior Member
Registered: 06/24/06
Posts: 335
Reply with quote  #5 
Bryce,

You bring up a good point.  What if the entire estate includes cash, stocks, bonds and real estate, etc...

Let's say that the REI is $100k upside down based on value at time of death but the estate has $250k in cash.

What are the options now?  If the heirs decide that they don't want the house, because its obviously upside down, can the bank try to take any of the $250k in cash to cover?




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brycewheeler

Senior Member
Registered: 03/09/09
Posts: 439
Reply with quote  #6 
Hi Biophase.  Couple of possibilities:

First is short sale where the estate can be "honorable" and work with the bank.  Takes 6 months or more typically but the Probate takes at least 6 months to a year or more so thats not a problem.  In a short sale, the Estate can try to break even and have the Bank take the $100k upside down in the shorts.  Start by stopping alll mortgage payments and have your Listing Agent/Broker negotiate a sale by MLS listing of roughly $100k below mortgage debt amount, paying all commissions, expenses of sale etc. so Estate can break even or close to it.

Second, stop all mortgage payments, don't try to sell, and negotiate to turn in the house key to the Bank, offerring a Deed in Lieu of Foreclosure to the property.  This works best if there is only a first mortgage (having a 2nd mortgage may complicate the matter).  This lets the Bank do whatever they want in their own good time, foreclosing or whatever.

The attorney who is handling the Probate for the Exector of the Estate (You???) should be advising you on these and other possibilities.  Decisions like these depend on a great deal of facts, only some of which are known,  the possible wishes of Decedent, and the wishes of the heirs, Executor etc., so you should rely on the advice of your Attorney in probate who can pull all these factors together and advise a strategy.

Bryce


ISamson

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Senior Member
Registered: 06/02/05
Posts: 2,302
Reply with quote  #7 
Isn't it totally different if the property is owned in a Living Trust and not going through the probate court ?





biophase

Senior Member
Registered: 06/24/06
Posts: 335
Reply with quote  #8 
Quote:
Originally Posted by brycewheeler
Hi Biophase.  Couple of possibilities:

First is short sale where the estate can be "honorable" and work with the bank.  Takes 6 months or more typically but the Probate takes at least 6 months to a year or more so thats not a problem.  In a short sale, the Estate can try to break even and have the Bank take the $100k upside down in the shorts.  Start by stopping alll mortgage payments and have your Listing Agent/Broker negotiate a sale by MLS listing of roughly $100k below mortgage debt amount, paying all commissions, expenses of sale etc. so Estate can break even or close to it.

Second, stop all mortgage payments, don't try to sell, and negotiate to turn in the house key to the Bank, offerring a Deed in Lieu of Foreclosure to the property.  This works best if there is only a first mortgage (having a 2nd mortgage may complicate the matter).  This lets the Bank do whatever they want in their own good time, foreclosing or whatever.

The attorney who is handling the Probate for the Exector of the Estate (You???) should be advising you on these and other possibilities.  Decisions like these depend on a great deal of facts, only some of which are known,  the possible wishes of Decedent, and the wishes of the heirs, Executor etc., so you should rely on the advice of your Attorney in probate who can pull all these factors together and advise a strategy.

Bryce


Hi Bryce,

I'm not going through this scenario right now.  I am however in the estate planning process and will be talking to my CPA about scenarios like these.  We are just trying to determine the best course of action with our real estate holdings right now.

I mean do we take our assets that are positive and place them in a trust and ignore any estate planning on upside down properties until they become positive worth?  I guess that's the big question for me.

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