California forclosure, short sale IRS, loan forgiveness

By
Real Estate Agent with McConnin & Company Realty

From  --  http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/06/05/BUGG5D3FNS1.DTL&feed=rss.business

Foreclosure taxes: Suppose your house becomes worth less than you owe, you can't keep up the mortgage payments and the lender forecloses on the property.

You may be liable for two types of taxes: capital gains and cancellation of debt income. The same holds true if you abandon the property or voluntarily turn it over to the lender.

These taxes depend on whether you have a recourse or non-recourse loan.

Non-recourse generally means that if the lender takes over your house, your debt is satisfied and the lender can't go after your other assets, even if the proceeds from the foreclosure sale are less than the debt.

In California, if you take out a loan to buy a house or a building with up to four units and you live in the house or one of the units, the loan is non-recourse.

A recourse loan generally means the borrower is personally liable for repayment. If the lender takes over the house that is worth less than the debt, the lender can go after the borrower's other assets to pay the difference.

A home equity loan or line of credit is a recourse loan. So are consumer loans secured by your house.

In most instances, if you refinance your house, the new loan is a recourse loan, says Michael Pfeifer, a real estate attorney with Pfeifer & Reynolds.

However, Roger Bernhardt, a professor at Golden Gate University School of Law, says there is no California case law that definitively establishes this as fact.

If you borrow money to buy investment property, it is generally a recourse loan unless it was financed by the seller, in which case it is typically a non-recourse loan.

-- Non-recourse loans. If you default on a non-recourse loan, you could be subject to tax on capital gains, but you won't be taxed on the cancellation of debt.

When a lender takes over a property, it's treated as a sale. Your "sales" price is the outstanding debt.

--- 

 

Advice to homeowners.  Get your Realtor or lawyer to put their claims in writing?  There will be law suits when next years tax bills come due.  

 

----

2/04/10 --- Update.

The rules have changed a bit since this post was first made.

For non recourse loans you want to look at CCP 580b.

For recourse loans your best protection may be CCP 726  - one action rule for the foreclosing lender  (watch out for second loans)

IRS Taxes - look at non recourse loans or the mortgage debt forgivness act

CA Taxes - look at non recourse

Exclusions  -- think about cap gains, insolvency - and for recourse loans you may wish to convert to a rental.

Finally beware that foreclosure anti deficiency laws may not necessarily be applied to short sales

 

 

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Anonymous
Anonymous
Chris
Yes, The property is in CA and both of the loans are with the same lender. From what I have read, if the loan is foreclosed on we will owe taxes on the amount that is forgiven.  Is this necessarily true in all circumstances, as this was our primary residence?
Aug 22, 2007 05:14 PM #17
Rainmaker
54,871
John McConnin
McConnin & Company Realty - San Diego, CA

When we start talking in specifics like this, my partners do not want me exposing them to malpractice suits without the people actually being clients of the firm.  I feel I am staying within the spirt of the internet. 

All the information you need to come to a pretty solid conclusion is on the net (probably on my two blogs).  My malpractice insurance company would require I know a lot more about your situation before I give you my opinion. 

I could give you a solid opinion on the first but I will have to give you a qualified opinion on the second. 

I really do believe you should have a lawyer working with you to create a good outcome in this situation.   

I harken back to lincoln - a lawyers stock and trade is his time and advice (and the ability to tell the IRS you did not report the loan forgiveness income on advice of counsel -- here is his number.) 

 

Aug 22, 2007 05:34 PM #18
Rainmaker
54,871
John McConnin
McConnin & Company Realty - San Diego, CA

When we start talking in specifics like this, my partners do not want me exposing them to malpractice suits without the people actually being clients of the firm.  I feel I am staying within the spirt of the internet. 

All the information you need to come to a pretty solid conclusion is on the net (probably on my two blogs).  My malpractice insurance company would require I know a lot more about your situation before I give you my opinion. 

I could give you a solid opinion on the first but I will have to give you a qualified opinion on the second. 

I really do believe you should have a lawyer working with you to create a good outcome in this situation.   

I harken back to lincoln - a lawyers stock and trade is his time and advice (and the ability to tell the IRS you did not report the loan forgiveness income on advice of counsel -- here is his number.) 

John McConnin

San Diego Real Estate attorney and Realtor 

 

Aug 22, 2007 05:35 PM #19
Anonymous
Anonymous
Stacey

I bought a home almost 2 years ago in Elk Grove, CA. Since than, my husband lost his job after not even a year into buying the home. In addition, his health has decline and he can't find another job to help me. I've held onto the house for over a year now paying the high mortage with just one income. It's just so sad seeing how we live paycheck to paycheck with nothing left, but slowly withdarwing from our bank accounts. My little family have been deprived of so much things and in 3 more years, our loan will jump from $2600 to $3000. We either drop the house now or will lose it later anyways.

I've called a couple of times and there's nothing that can be done with the loan. My loan is a CalHFA 1st time buyer 35 fixed with first 5 years of just interest and than next 30 years with principle on a 380K. The loan is in both our names and income. In our situation, we just stopped one month of no payment. We're still waiting to see if the bank will contact us to modify our loan, but if not... can the IRS or bank come after my remaining bank accounts, cars, paycheck, ect? I'm willing to pay the tax difference as an earn income, but with time. OR can we be forgiven, because it's out of my hands and I'm not willing to wait any longer to see my life saving thrown away for nothing? 

Mar 06, 2008 04:24 PM #20
Rainmaker
54,871
John McConnin
McConnin & Company Realty - San Diego, CA
Please see my new post. 
Mar 07, 2008 02:10 PM #21
Anonymous
Anonymous
Anonymous

you ask tough questions.  I would want to read your loan docs.  Then I would want to know if you have purchase money loans. If this is your principle residence and acquisition debt - you may not have to pay any loan forgiveness.  

Basically you need a recourse non recourse analysis and a workout strategy.  Also you need to make sure your workouts relieve you from any deficiencies.  

 

To get specific answers I would need to know more specifics.  

 

Mar 07, 2008 11:42 PM #22
Anonymous
Anonymous
Bryan

I own a house I bought 3 years ago with CalHFA.  I have made all my payments on time and have excellent credit.  I just bought a second home and have moved there.  I recieved a "Notice of Election to Accelerate" stating this loan was purchased with funds received from the sale of tax exempt bonds... The choices they gave me are:

  1. Reoccupy the property.
  2. Pay the note in full.

Failure to do so will result in foreclosure proceedings.

I have a tenant living there with a 12 month lease aggreement as well.  I do not plan on moving back.  The relocation was for my family.

Note:  The first house is upside-down too.  The Note is $226,000.  Market Value is $145,000.  So, a sale is out of the question.  They told me to ShortSale it.  Come on.  Why would I do that?  Why would they ask me to?  I have paid all payments!  Why would a lender want to force a repo?  I have sent a letter stating my move and asking permission to rent it out.  Per their request.  Still waiting to hear back.  However, this will only grant me permission to do so for 1 year.  I will still be forced to move back after that.

What are my options here?  Do I walk?  Should I continue making payments til the very end?

Frustrated and Angry,

Bryan

Sep 17, 2008 01:33 PM #23
Anonymous
Anonymous
Bryan

Thanks,

They just granted me permission to rent for 1 yr.  So, now I need to determine if I should prolong the inevitable. Do I continue to put money into something that is upside-down?  I will be forced to sell it in a year anyhow.  The market will not rebound that fast for me to break even.

Sep 17, 2008 04:35 PM #24
Anonymous
Anonymous
Andy

Hi,

I am living in California and bought a house just two years ago. This house is my primary residential house.

My first lender is Bank of America and also I have 3% loan with Cal Housing Agency (ACORN).

As I know, my first loan is Non-Recourse.

How about my loan with ACORN ? Is it also a Non-Recourse ?

Thanks.

Dec 10, 2008 10:16 AM #25
Rainmaker
54,871
John McConnin
McConnin & Company Realty - San Diego, CA

I have had one client with a acorn loan.  

If I remember correctly - there is some information about these loans on acorns website.

Since there is an interaction with a public agency - I would proceed deliberately, making sure I confirmed all information with a writing. 

We eventually would up with confirmation in writing, but I do not remember how we got it.  I could re open the file but it would be a waste of time for you.  As an attorney I have learned to not make any assumptions when dealing with governments or government agencies.  They like to exempt themselves from statutory schemes.

 

Dec 10, 2008 01:06 PM #26
Anonymous
Anonymous
Chris

I purchased my home in 2005 with CalHFA 30 year fixed program.  The purchase 
price is $370,000 the mortgage are as follows. 
 
Primary = $322,800 
 
Silent Loans (consists of 3 different silent loans) = $47,200 
 
Current Payment = $1,910.73 (Includes taxes and insurance) 
 
---------------------------- 
Primary Loan Balance = $296,888.66 
Secondary Loan Balance = around $52,000 (No monthly payment for silent loan but 
interest grows each year). 
 
 
With the numbers above, my mortgage balance is close to $350,000. Based on my 
current tax assessment, the home value is at $ 165,000. Also, same model homes being foreclosed in our community is selling for $239,000 
 
I purchased the home when I was single. I am now married with 2 children. We are
still current on our mortgage and can still pay the amount. My wife however, 
feels that we should modify the loan to its current value, foreclose on our home 
and rent or she can get a house for a less monthly mortgage so that we can save 
for our kids education and for our retirement. I tried to apply for a loan 
modification by submitting the forms myself early this year but was denied by 
CalHFA saying that they do not participate with the government program. 
 
We considered renting the house but the CalHFA requirement for the loan is that the house stay as my primary home or I will need to payoff the loan. 

What is the best option for this kind of situation. 
 
Thanks!  

Dec 09, 2009 06:16 PM #27
Rainmaker
54,871
John McConnin
McConnin & Company Realty - San Diego, CA

its been over six months since I went to the CalHFA website but first I would figure out what happens if you take a foreclosure

 

http://www.calhfa.ca.gov/myaccount/cmp/program.htm

 

I do not think their programs are exempted from California's anti deficiency laws.  But, until I learned that for myself, I can not give you any legal advice.  I am sorry.

If you can not get a loan mod you like

Try a short sale but make sure your are released from the remaining loan balance in writing and make sure you Realtor knows how to execute on that plan.  Also make sure your Realtor has closed at least 5-10 short sales. 

If the short sale terms are not satisfactory you may wish to speak with a lawyer (like me) who could do the research and make sure you can walk away safely.



for more one california walk away plans and foreclosure laws

Dec 09, 2009 06:59 PM #28
Anonymous
Anonymous
Chris

Thanks for the reply John. 

When you say that you don't think their programs are exempted from CA anti-deficiency laws, do you meant that there is a chance that I can get a short sale and be released from the remaining loan balance?  

Does the release usually be in written form and will be known at the beginning of negotiation for short sale?

How much does it cost me to do a short sale? Do I pay sales commission or do I need to come out of cash to do a short sale?

Thanks!   

Dec 11, 2009 11:19 AM #29
Anonymous
Anonymous
Chris

If I understand you correctly, review fees or transaction management fees is for someone who have their house listed on a different broker. If I decided to let you handle my short sale, there is no fees that I have to worry as all fees will be paid by the bank is this correct? 

I recently talked to a shortsale company but I was told that they can't help me unless I'm late on my mortgage. Is this true that I need to be late in order for my lender to take note on my shortsale application? 

 

Dec 14, 2009 11:01 AM #30
Anonymous
Anonymous
Rebekah

 

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We bought a house through CAL HFA in 2005. Paid on time every month till last March 09 when we lost have our income. We applied to their modification program but had to be 2 months late in order to qualify. The recommended that we short sale but we didn’t want to go there. So that's we did. We went back and forth on financial documents in order to have the right cocktail of numbers to be put in front of their modification underwriters. First we made too little money and/or expenses were too high. So after 3 times of redoing the numbers and now adding extra income of $700 as rental income from my father having to move in with us, they pushed us through to the modification department. This time frame was from March-July. Also during this time they started foreclosure on the property with an auction date of Nov 22.

I was confident that we'd get a modification since we fit the description perfectly of the Obama Housing plan but this was not the case. The denied the modification application in August saying we don't make enough money to afford a modification. Based on their info they also screwed up a bit with our numbers saying that our gross amount was a particular amount which was actually a net number. Our contact in the modification department at that time went back to the underwriter who tried to work out a way for us to be able to afford the modified new payment.

According to them the amount would be more than our current $2500 per month amount. This was very confusing but we still wanted to get the modification. They advised us to work with the numbers again and re-apply but that we would have to go back to loss mitigation department and start over. Contacted loss mitigation dept (this was now around mid August and again they said, “why don’t you just short sale. I went to the loss mitigation department to try and expedite the new application but management there told us that we got denied because we make too much money. They advised that we could do a payment plan where we give them 5000 dollars and do a 500 extra payment per month. Then they called and said 10,000 and then another phone call and said 14,000. We told them that I cannot do 14,000 at once and could we negotiate something else. They were to get back to us (Sept).

After not hearing from them, we decided that it was probably the best to short sale so we contacted them to get that process started.  We got the packet, sent it in and they said its probably best to have an offer in by the end of October since the foreclosure date is still happening in Nov (22). I also told our contact to not use the extra $700 rental income from my father as he was moving out due to us selling the property. We got a realtor, put the house on the market, got a qualified buyer and submitted the offer the last week of October.  At that point our realtor was in communication on our behalf with their short sale dept.

They foreclosed on us anyway. Upon enquiry post auction, they said that the short sale had been denied the day before the auction based on 2 points.

<!--[if !supportLists]-->1.      <!--[endif]-->We made $600 dollars too much

<!--[if !supportLists]-->2.      <!--[endif]-->We did not start the short sale process 90 days before hand as that is their policy but that we nor our realtor were made aware of that.

The crazy thing is that 90 days before auction date would have been August 10th and at that point they were still reviewing the modification packet and hadn’t denied it.

We did everything as requested and went on their timeline so we feel shocked and disturbed at the end result. Now they are going through eviction proceedings as we have received a “Delayed Access to Unlawful Detainer” paper from the courts.

What to do? Anything at all? See a lawyer?

<!--[if !supportLists]-->·         <!--[endif]-->Bought for $385K

<!--[if !supportLists]-->·         <!--[endif]-->Valued by tax assessment @ $150k

<!--[if !supportLists]-->·         <!--[endif]-->Put on the market and received offer for $137K (average comparable home price in the area 99-140K)

 

Jan 13, 2010 05:07 PM #31
Anonymous
Anonymous
Chris

I feel for you Rebekah.  We are trying to work out with the lenders but it seems that they just don't care. 

I too have CalHFA and have been contemplating on just letting it foreclose or try to negotiate a short sale. By the way, do you know if CalHFA can come after you for the loan balance (deficiency)?  

Please update us on your situation.  

Feb 03, 2010 12:41 PM #32
Anonymous
Anonymous
Rebekah

Still in eviction proceedings..waiting for the actual summons. As far as I know, because it was my principal residence, they cannot come after us. In the meanwhile, I was thinking that we should start an underground speakeasy as a last hurrah.

Today I heard that there is some interesting legislation being put forth on when consumers with foreclosure records can buy again. They're going for 12-24 months from foreclosure. Not that I have any interest in working with a bank again.

Feb 03, 2010 07:12 PM #33
Anonymous
Anonymous
Chris

Interesting. I was looking around online but could not seem to find talks about the legislation you were mentioning here. Hope it's true. 

Feb 04, 2010 03:50 PM #34
Anonymous
Anonymous
Karen

Unfortunately, CalHFA is not willing to help everyone avoid foreclosure.  I am a person who got one of those 100% financed loans from CalHFA.  I got married a year ago and bought a home together with my husband.  I rented my home so that I could cover at least part of the mortgage (I take about a $100 loss per month).  CalHFA is now foreclosing on my property because it is non-owner occupied.  They claim that I do not have a valid financial hardship in order to be able to continue to rent the property.  However, I have argued that I do have a financial hardship because of the current status of the housing market.  I owe approximately 25,0000 to 35,000 more than what the house is worth at this time.  I cannot afford to sell it and I cannot afford to refinance it.  CalHFA is refusing to work with me at all.  I am really in a state of shock that I will be losing my house to foreclosure because of a federal tax law and not because I am delinquent on my payments.  I am ready, willing, and able to make my mortgage payments, but CalHFA will not accept them.  I do not want to walk away from my loan.  I do not want anyone else to be responsible for my debt.  I want to be responsible for what I owe.  However, I am not being given the chance to do so.

Oct 09, 2010 03:48 PM #35
Anonymous
Anonymous
Jenn

Does anyone have any updates on their final results with Calhfa?  Especially Karen? I'm in a similar situation -- got a loan through calhfa 4 years ago and in the meantime I've had a family.  The condo is only 575 sq ft so we cant all obviously live there.  I'm wondering how Calhfa will know if I rent it out?  Also, did they eventually work with you to do a loan mod or short sale, or did they insist on foreclosure?  Any updates would be appreciated.  I, like Karen have no problem continuing to pay my mortgage until I can refinance to a different lender or can sell it.  I just HATE the fact that Calhfa can force me into foreclosure when I'm making my monthly payments.  I live in fear of them all the time :(

Feb 01, 2011 01:21 PM #36
Anonymous
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