Let’s say I buy a note or a lien against some property for $100. 6 months the person defaults and I foreclose and I’m sitting on a $75,000 house. I want to sell but it is worth it to wait a year to pay less CG tax. When did the year start? When I bought the note that turned into a house (from an asset point of view) or when I got the deed to the house?
I don’t know the answer for sure, but as this question is about to fall off the first page unanswered, I’ll give it a go.
If you buy a winning lottery ticket, when do you count as getting the income, on purchase or when the draw has been done and you get the money? The latter.
If you work and get paid every two weeks, when do you get the income - when you actually perform the work or when you get paid (let’s ignore companies filing on an accrual basis)? The latter.
Based on this (and the lottery example is the closest) the event takes place when you actually receive the asset, not when you buy the note.
That doesn’t answer the question. The taxable event occurs when he sells the house. Your other (correct) examples were all about taxable events, which for a cash basis taxpayer are when he receives the cash.
The issue here is when does the holding period for capital gains taxes purposes begin. IOW, when did he *start *owning the asset which was later sold and triggered a taxable event?
I am tax-wise but I’m NOT a tax pro. What follows is informed surmise, not expert opinion.
IMO …
Your hypothetical is wrong. You have two taxable events. One when the lien converts to a deed, and a second when the deed & house are sold on to somebody else.
In the first taxable event, the basis is the price you paid for the lien & the holding period begins on that date. The foreclosure date and the value established by appraisal or other documentation of the foreclosure proceeding establishes the sell-side of the first taxable event.
That also establishes the cost & date basis of the buy side of the second transaction. Which will complete when you eventually sell the house.
Again this is IMO, not professional advice because I’m not a professional tax guy.
I can see that, but then am I liable for taxes when the lien becomes a house and will the IRS come knocking on my door for CG Tax on $74,900?
*Assuming * (big if) my thinking is correct, then yes they will wnat that money in the tax year the foreclosure consumates.
The situation is roughly analagous to people receiving stock options/warrants or homeowners who have imputed income from debt forgiveness in a short sale or foreclosure.
The holding period for the house definitely starts at the date of foreclosure.
I don’t think there are two taxable events, though. The $100 lien, plus other foreclosure costs, becomes the cost basis of the house. I wouldn’t bet the farm on this without more research, but it seems right.