Thus, the court's decision has clearly enhanced the use of wraparound mortgages in structuring installment sales of mortgaged real estate when existing indebtedness exceeds the basis of the property.
Orbach, "Installment Reporting: Wraparound Mortgages After the IRS's Temporary Regulations and Hunt," Journal of Real Estate Taxation (Winter 1985): 145.
In 1980 my article, "Installment Sales of Mortgaged Real Estate and the Wraparound Mortgage," on the use of a wraparound mortgage in the sale of real estate on the installment basis, appeared in The Appraisal Journal.
Though a wraparound mortgage is no longer necessary to avoid the impact of the 30% test, it can provide two important tax advantages for an installment seller.
In my earlier article, I observed that a wraparound mortgage was commonly used to circumvent the problem of having to report the excess of loans over basis as a payment received in the year of sale.
A wraparound mortgage is simply a mortgage that a buyer issues to a seller, of which the principal amount includes the outstanding balance due on the existing indebtedness that encumbers the property.
Treasury issued a temporary regulation that took the position that a wraparound mortgage should be treated as if the buyer had acquired the property subject to the wrapped indebtedness.
By invalidating the regulation, this decision makes the use of a wraparound mortgage more viable as a planning tool in disposing of mortgaged real estate on the installment basis.
Because the wraparound mortgage agreements define and govern the parties' obligations, the terms of the documents generally control the tax treatment of the transaction.
As a result of the tax court's decision in Professional Equities, the use of a wraparound mortgage will result in a lower gross profit ratio.