Guess Who Wants to Pay Higher Taxes? - REO Investors

By
Services for Real Estate Pros with BidOnRealty.com
http://actvra.in/8kx

There was an interesting article in The Orlando Sentinel  this morning.  It seems we have a flaw in the system for properly recording the sales prices of foreclosures sold via auction at the courthouse.  The vast majority of these properties are purchased by investors with the intent of doing a quick re-hab and then "flipping" the property. Counties in Florida collect a "documentary stamp" tax based on the sales price of a piece of real property.  The tax is 70 cents per $100 in sales price.  Under our current system, a buyer at a courthouse foreclosure auction is given a bill of sale based on the winning bid, but is not required to present the bill of sale when reporting the sales price to the county for calculation of the documentary stamp tax.  It appears many investors are over-inflating the sales prices of the properties they purchase via these auctions. 

Why would they do such a thing?  Simple: Greed.  They are doing it for good ol' fashioned American greed.  These investors can do this legally (let's leave ethically out of it) and avoid a huge chunk of capital gains tax when the property is sold.  As an example:  Investor purchases a property at the auction for $100,000.  He reports the sale to the county for documentary stamp tax purposes as $125,000.  This little move cost the investor an extra $175.  Now, assume the investor put $10,000 in re-hab into the property.  Now he's in it for $110,000.  He puts the house back on the market and sells it for $150,000.  His gross profit is $40,000, but as far as the IRS is concerned, it's only $15,000, saving the investor approximately $7,000 in capital gains taxes.  Nice huh? 

The article failed to mention another important motivation for falsifying sales prices by foreclosure investors:  Many, if not all lenders require significantly more documentation to justify the sales price on "flip" transactions, when a sales price is significantly higher than a recent sale (be it a foreclosure auction or not) of that same property.  This scheme is another way for these investors to beat the system.  And finally, this practice is bad for the system as whole, because it improperly enables the recording of incorrect data in the county records.

It looks like the "flaw" will probably be fixed quickly, but how much damage has already been done?  Probably millions in federal tax revenue has been lost, not to mention buyers who may have been at least partially duped on their purchase of the these properties flipped by the investor.  I guess the county got a little extra revenue, which is good.  Quite frankly, I'd just as soon they didn't in this case. 

 

 

 

 

 

 

 

 

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Show All Comments
Rainmaker
546,890
Kathy Toth
Ann Arbor Market Center Keller Williams - Ann Arbor, MI
Ann Arbor Real Estate Experts - Kathy Toth Team

Good catch on the system ill equipped to handle so many new kind of sales - via auction!

Apr 15, 2011 08:53 AM #1
Rainer
102,960
Tom Robinson
Keller Williams Realty Kingstowne/Alexandria, VA Office - Fairfax, VA
Experienced Real Estate, Professional Serving No. VA and DC

Interesting "game" on the system. I wonder how the IRS might interpret that in an audit.

Apr 15, 2011 08:58 AM #2
Rainer
135,266
Jeanne M. Gavish
Jeanne Gavish, Keller Williams Realty Elite Partners - Spring Hill, FL
Keller Williams Realty Elite Partners - CIPS,GRI,S

Very interesting information. Thanks for sharing.

Apr 15, 2011 08:58 AM #3
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

Kathy - Luckily, I think the "loophole' will be quickly plugged.  I also wanted to draw attention to the fact that our system here at BidOnRealty relies on the Realtor community to handle the transaction, but using a competitive online auction system to manage (and force) multiple offers.  Thanks for commenting.

Apr 15, 2011 08:59 AM #4
Rainer
69,339
Chris Mayr
D3 Interactive Marketing - Orlando, FL

Mitch, you must read the Sentinel faster than I can.  I was about to put together a similar post.  That really shows that these auctions should be done in the sunshine with a mechanical means of arriving at the final value.  That produces a record that is easily reviewed.

Kathy, unfortunately, this has been going on for decades.  The problem is related to the courthouse steps auctions that in Orlando consists of a dozen to a few dozen old codgers sitting in a smokey room bidding on these things.  This is the same group that fought the use of open online bidding for these same properties.

Perhaps now we know why.

Apr 15, 2011 09:00 AM #5
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

Tom - I'm not sure if audits are going to be done at the county level to root out these evil-doers, and if so, will the results be forwarded on to the IRS.  If the are, some of these pigs could be wallowing in doo-doo.

Jeanne - Thanks for stopping by.

 

Apr 15, 2011 09:03 AM #6
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

Chris - Yes, I once took a speed reading class;)

Apr 15, 2011 09:04 AM #7
Rainmaker
508,177
Christine Smith
Buyers Brokers Only LLC - www.BuyersBrokersOnly.com - Canton, MA
Exclusive Buyer Agent & Attorney, Canton, MA

Mitch...I am surprised that the bill of sale or other evidence of the actual sales price isn't required or automatically put on record or something.  I guess it works for the county as they are getting higher payments.  I doubt the IRS looks too keenly on it though!

Apr 15, 2011 09:31 AM #8
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

Christine - You're absolutely right.  I think Uncle Sam is going to have a big problem with it.  Our county comptroller's office and county property appraiser have really lost face on this, so I bet it gets fixed very quickly.  Thanks for coming by (in a non-invasive way;)

Apr 15, 2011 09:36 AM #9
Rainer
213,798
James Loftis
Real Estate 911 Inc - Hollywood, FL
Real Estate 911 Inc

Interesting article, thanks for sharing.  Who's the guy at the desk?

Apr 15, 2011 09:42 AM #10
Rainer
369,954
Tish Lloyd
BlueCoast Realty Corporation - Wilmington, NC
Broker - Wilmington NC and Surrounding Beaches

Mitch ~  So, about that whistle -- seriously, looks as though there might be an opportunity to cash-in on some mask sales.  This just turns your stomach; thanks for sharing and shedding light to those who don't read the newspaper.

Apr 15, 2011 09:48 AM #11
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

James - Porky - REO scavenger extraordinnaire.

Apr 15, 2011 09:49 AM #12
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

Tish - OK, I admit it.  I still read a paper in newsprint.  However, I do recycle.  Old habits are hard to break.  Thanks for stopping by.

Apr 15, 2011 09:52 AM #13
Rainmaker
311,259
Glenn Roberts
Retired - Seattle, WA

It's hard to believe a government entity would allow anyone to report any thing like that without documentation. I can't think of anything...well, maybe liar loans. Hope your system changes soon. Someone not paying their fair share, cost the rest of us more.

Apr 15, 2011 10:02 AM #14
Rainer
59,458
Mitch Gover
BidOnRealty.com - Orlando, FL

Glenn - Yes, pretty shameful.  I'm not sure how aggressive the county will be in auditing past transactions, given their limited budget.  Perhaps they could get a piece of the action from any recovered federal tax revenue.  Like that would ever happen.  Thanks for commenting.

Apr 15, 2011 10:24 AM #15
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Rainer
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Mitch Gover

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