Tough question.

I would say that if you were to write this person a check for $42k, and not take title to the house, that payment would be deductible to you as a business expense.

If you write this person a check for $42k and then take title of the home, it seems that you would not claim a loss this year, and instead would be the proud owner of a piece of property with a basis of $42k.

Perhaps it make sense to write this person 2 checks. One to purchase the home for its appraised value. And a second to repay this person for their losses. This would at least allow you to write off the true value of the losses you will incur.

I would definitely recommend that you get a second opinion from your tax preparer who hopefully works with a lot of real estate professionals. If you don't have one, check out www.FindAGoodCPA.com. There are a few dozen CPAs and EAs listed on that site's directories who deal with real estate agents and brokers.

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