A wraparound mortgage, often called just a "wrap" in the real estate industry, is a second mortgage held by a lender who collects payments on both it and the first mortgage from the borrower. The lender then makes payments to the original mortgage holder.

A Tax Court decision from the Ninth Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington) held invalid the treatment of wraparound calculations as outlined in Reg. 15A.453-1(b). (Professional Equities, Inc., (1987) 89 TC No. 15.) The regs treat the wraparound mortgage as a mortgage assumed and require two calculations of profit percentage--one in the year of sale and another in later years. In Professional Equities, the Court allowed computation of the installment sale (which included wrapped mortgages) according to the old method followed in Stonecrest v. Comm. 24 TC 659. In the Stonecrest case, the wrapped mortgage was not considered a mortgage assumed or taken subject to by the buyer. Vincent E. Webb, TC Memo 1987-451 also followed these decisions. The IRS has acquiesced to the findings in the Professional Equities case.