Expert: Dick Dennis - 3/23/2010

Question
A friend and I purchased a home in Arizona in 2003.  We originally purchased the home as Joint Tenants.  Since the original purchase we have refinanced twice.  My friend destroyed his credit prior to the first refinance so we had to take him off the loan.  He is now only on the deed.  We owe $202,000 on the home and it recently appraised for $196,000.  We have split all costs 50/50 for the 7 years of joint ownership.  
I now would like to purchase him out of the house so I can live in it myself.  Again he is no longer on the loan but he is on the deed.  I am planning to file a Quit Claim Deed.  We are currently upside down $6,000 and don't know how much to offer my friend to buy him out of the house.  I plan to stay in the house for 5 more years before I want to sell it.  Am I making a mistake trying to pay him on a mortgage thats upside down?  If I pay him $15,000 can I write that off on taxes as a capital loss?  What are your thoughts?

Answer
With just $6,000 difference between loan balance and property value, and in consideration half of that $6,000 is yours, I wouldn't pay him a dime. Just have him GIVE YOU a quit-claim deed AFTER you have checked to make sure that there are no liens on the property you are not aware of.

The reason why I say do not give him a dime? Because how about the property taxes? Who's going to pay that? Who pays the property insurance? You or both of you? No, when all expenses are done, he would probably OWE YOU. But if you're anxious to get him outta there, then pay him whatever you want.

No, you do not claim a capital loss on a property until you sell it. You are not selling it. Additionally, you cannot claim a loss on a residence, taxwise. Only PAY capital gains taxes. Plus both of you may need to pay state income taxes (you better check) on the reassessment of the property. Your loan is no longer a purchase-money loan which would protect you from paying any money in taxes you owe to the bank. Remember, you refinanced, turning that loan into what they call a "hard-money" loan. However the IRS will not ask for any money due on that situation until 2012. But your state may have other plans.

Therefore, I would recommend you consult a local tax attorney, CPA or favorite tax expert to make sure you are doing all this correctly. Yes, parting the ways can get a little stinky. I do wish you well.

Dick Dennis
CA Broker Lic# 00349415
dixiedee13@aol.com