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.

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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.  

 

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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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Tags:
california short sale
california foreclosure
irs loan forgiveness

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Anonymous #32
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.  

February 03, 2010 12:41 PM
Anonymous #33
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.

February 03, 2010 07:12 PM
Anonymous #34
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. 

February 04, 2010 03:50 PM
Anonymous #35
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.

October 09, 2010 03:48 PM
Anonymous #36
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 :(

February 01, 2011 01:21 PM
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Additional Information

Short sales in San Diego and Orange County from a Carlsbad California Real Estate Attorney and Broker.