What is the tax treatment when mortgaged property is sold?

If mortgaged property is sold, the amount realized is the net purchase price, minus the cost basis, whether or not the seller receives any of it. This is consistent with the rule that borrowing money is not taxable.

Example

You purchase an investment property for the amount of $150,000 with $20,000 down and a mortgage of $130,000. After 10 years the mortgage is reduced to $80,000 and the value has increased to $2000,000. You refinance the property and take a mortgage of $160,000 and use the additional  money for other investments. Shortly after that you sell the property for $210,000.

You have selling costs of $15,000. The net cash received from the sale is $210,000, minus the $15,000 in selling costs and the mortgage of $160,000, for a net cash total of $35,000.  However, $35,000 is not your capital gain.  Your capital gain is $210,000, minus selling expenses, minus your cost basis of $150,000 (the amount originally paid for the property). Therefore your taxable capital gain is $45,000, even though the cash received was only $35,000.

Many taxpayers today are running into rather serious problems with investment properties because of the serious housing slump. Many of them refinanced the properties as they increased in value, and used the money for other investments. They may be required to sell their properties because they can no  longer manage the mortgages, and they are selling for less than the mortgages, but often still have a taxable gain and the short sales produce cancellation of debt income as well.

Case Study: Tax Treatment of Mortgaged Property Sales

Case Study 1: Mortgage Protection Insurance, SecureGuard Insurance

SecureGuard Insurance provided mortgage protection insurance to individuals who sold mortgaged property. When selling mortgaged property, the seller may face potential financial risks if the sale proceeds do not cover the outstanding mortgage balance. Mortgage protection insurance ensures that the seller’s loved ones are not burdened with the remaining mortgage debt in the event of their death.

This coverage from SecureGuard Insurance would pay off the remaining mortgage balance, allowing the seller’s family to inherit the property free and clear or to receive the proceeds from the sale without the financial burden of the mortgage debt.

Case Study 2: Title Insurance, SecureTitle Insurance

SecureTitle Insurance offered title insurance coverage to individuals selling mortgaged property. Title insurance protects against potential title defects or claims that may arise during the sale process. In the case of a mortgaged property sale, title insurance ensures that the seller has clear and marketable title, free from any issues that could jeopardize the transaction.

This coverage from SecureTitle Insurance provides peace of mind to the seller and protects them from potential legal disputes or financial losses related to the property’s title.

Case Study 3: Liability Insurance, ProtectShield Insurance

ProtectShield Insurance provided liability insurance coverage to individuals selling mortgaged property. Liability insurance protects the seller from potential legal claims and financial losses arising from accidents or injuries that occur on the property during the selling process.

This coverage from ProtectShield Insurance ensures that the seller is protected in case of any unexpected incidents or claims that may arise during property showings or inspections. By mitigating the risks associated with potential liability issues, liability insurance provides essential protection to the seller during the property sale.