Buy and Bail questions

Welcome to the LoanSafe Forums!
Get free mortgage help today. Since 2007, the LoanSafe forums have helped millions of homeowners over the last 13 years either save their homes with a loan modification, obtain a short sale, forbearance, or walk away legally from their underwater mortgages.
Register for FREE

StuckInAZ

LoanSafe Member
Aug 22, 2009
110
2
0
InTheDeepEnd - Thanks for posting this, but, unless I'm missing something, all this does is reaffirm the fact that non-recourse loans in California do not need to calculate the COD income. Obviously KFish's rentals and my primary are located in Arizona, which SHOULD be the same in terms of tax consequences, although I haven't seen an equivalent document to what you've posted. Both of our properties are on non-recourse loans and thus with that baseline should be exempt from any tax consequences based off of Federal IRS rules, which are also summarized in your post.

What I have been trying to say in my posts is that even though I SHOULD be covered by the non-recourse status (as should KFish), I would rather be qualified under the more recent and more straightforward TRA of 07, which is where the definition of a primary residence comes into play. I would rather be qualified under this because of advice that my attorney and tax pro have given me.

Additionally, I am further curious about the 1099s and if non-recourse loans will be receiving one, because as your post shows, COD Income does not even need to be calculated for non-recourse loans, in Cali anyway. It sounds like both KFish and I are planning on receiving one (per lender) and I believe the required tax filing action upon receiving one probably involves Form 982, but I do not know that for sure.
 

KFish

LoanSafe Member
Oct 27, 2009
964
5
0
San Diego, CA
Hey Stuck...

Hmmm...since we both used the same attorney, how did you understand it? I was on the phone with him for 1 1/2 hours...and my understanding is the "no recourse" meant they dont come after you for the money...they just forgive the debt, resulting in 1099. I thought the lender forgiving the debt (no recourse) MEANT that you get a 1099, a requirement when lenders forgive debt. Maybe we need to get this confirmed??? I will throw a party if we dont get 1099s!!!!! We will make less money now so that means I can claim the losses, and get a big return to boot!!! Hmmm...sounds too good to be true!!!

Curious Stuckinaz...how did you come across the attorney? I thought he was pretty good, had a ton of knowledge about the laws, etc....

Lets get this clarified cause its making me excited!!! :)
 

InTheDeepEnd

LoanSafe Member
Nov 6, 2009
22
0
0
I guess I am confused as to what the Tax Relief Act of 1997 has to do with your situations re: foreclosure. I think that the legislation you should be looking to fall under is the Mortgage Forgiveness Debt Relief Act of 2007. Can you explain your train of thought here?

As far as the 1099 (1099-C in our case)....
The 1099-C is issued for a Cancellation of Debt . If there is no debt cancelled (which is typically the case if you have purchased a house in the last few years that is now underwater) then why would you be expecting to receive a 1099-C?

Maybe part of the confusion is the difference between a 1099-A and a 1099-C?

Anyone who forecloses (or short sales) for that matter should receive a 1099-A indicating that they have "abandoned" their property. However, if you live in a non-recourse state and you walk-away from your primary residence (the house you have lived in for the majority of the past two years), you should not receive a 1099-C because no debt was forgiven.

I am by no means an expert on this, just have read my fair share of thrilling IRS publications. If you are interested, flip through Pub 4681 for lots of example scenarios....and please feel free to correct me if anything I have said seems to be contradicted by what you have read.

PS Does anyone find it funny, that after so many people on this forum have consulted with tax attorneys, CPAs, lawyers, etc. no one has gotten a definitive answer? Even the IRS literature uses a lot of should nots instead of will nots! :confused::confused:
 

StuckInAZ

LoanSafe Member
Aug 22, 2009
110
2
0
I'm sure our conversations were pretty different given our disparate situations, but I think we both have a good handle on exactly what is going to happen during this process. I am just trying to work out the exact details because I get anal like that, so apologies if I am making you question your understanding.

After looking some more, this is all just a moot point. The lenders will most likely send 1099s upon cancellation of debt because that's just what lenders do, and even though for us non-recourse folks it wont result in additional income, they will probably send it anyway since it's all automated and they are a big lumbering corporation.

Now, even though assuming you get 1099s from your lender(s), my understanding is it shouldn't result in additional income due to the cancellation of debt simply because the loans are non-recourse. Thus no need to offset it with anything. I would expect this to be the case whether we are talking about one primary residence or multiple investment properties. Of course there may be more complexities with depreciation or other tax breaks you may normally take, but I'm sure your tax pro can guide you through those. Is this your understanding?

Btw, I got this lawyer recommendation from dogatemy. I had picked out a few possibilities including this one and I personally like it when they have exposure to the general public through a blog or some other means as it makes me feel like they are more involved in that subject then the typical attorney.
 

StuckInAZ

LoanSafe Member
Aug 22, 2009
110
2
0
I guess I am confused as to what the Tax Relief Act of 1997 has to do with your situations re: foreclosure. I think that the legislation you should be looking to fall under is the Mortgage Forgiveness Debt Relief Act of 2007. Can you explain your train of thought here?

As far as the 1099 (1099-C in our case)....
The 1099-C is issued for a Cancellation of Debt . If there is no debt cancelled (which is typically the case if you have purchased a house in the last few years that is now underwater) then why would you be expecting to receive a 1099-C?

Maybe part of the confusion is the difference between a 1099-A and a 1099-C?

Anyone who forecloses (or short sales) for that matter should receive a 1099-A indicating that they have "abandoned" their property. However, if you live in a non-recourse state and you walk-away from your primary residence (the house you have lived in for the majority of the past two years), you should not receive a 1099-C because no debt was forgiven.

I am by no means an expert on this, just have read my fair share of thrilling IRS publications. If you are interested, flip through Pub 4681 for lots of example scenarios....and please feel free to correct me if anything I have said seems to be contradicted by what you have read.

PS Does anyone find it funny, that after so many people on this forum have consulted with tax attorneys, CPAs, lawyers, etc. no one has gotten a definitive answer? Even the IRS literature uses a lot of should nots instead of will nots! :confused::confused:
Better start quoting to avoid confusion here. I am in fact referring to the Debt Relief Act of 2007, even though I was referring to it as 'Tax Relief Act', so my apologies there for any confusion.

I'm not sure about your statement on 1099-C. My understanding is that any house that is underwater with a non-recourse loan, the lender will most likely be canceling debt. If my mortgage is 200k and I foreclose and the lender sells it for 150k and they are not allowed to pursue me then technically they are canceling 50k of debt, thus issuing the 1099-C. I have read in Pub 4681 though that cancellation happens only when you are personally liable (i.e. recourse), so I really don't know what to believe at this point. I'm not so sure that lenders are smart enough to tailor 1099-Cs to specific state laws, purchase money situations, etc and I would guess they just send out 1099-Cs to everyone.

It's funny you mention Publication 4681, as I actually read it earlier today and still have the pdf open here. It does give scenarios, but most are for recourse loans.

And I agree how its funny that there is so much confusion even when so many professionals have been consulted. This was my attorney's point essentially that it's all a little gray area when it comes to 1099-Cs, tax consequences, non-recourse loans, etc. Which is why both he and my tax pro strongly recommended to make sure I fall under the Mortgage Debt Relief Act of 2007, because it is well defined there.

BTW, you state "the house you have lived in for the majority of the past two years" as the definition for a primary residence. Where are you getting this definition from?
 

camilami

LoanSafe Member
Jun 27, 2009
35
0
0
Hi everyone - I'm just getting caught up. The way I understand the tax law, foreclosure on a nonrecourse loan is NOT "cancellation of debt" by definition. It clearly says it is treated as a "SALE" and is therefore subject to capital gains rules. But if there is a loss, there is no gain. And KFish, it says the "adjusted basis of the home" which is typically what you paid for it plus any improvements. And it clearly says nonrecourse loans are exempt.

As for the principle residence issue, the way I see it is most people move before the home completes foreclosure. If someone moves to a rental will they say, "Aha! The first house is no longer your principal resident!" I doubt it. I just happened to move to a house that I purchased, not rented. The old house was never rented out, is too close to be a vacation home, and certainly is not an investment home. It's only use was as my principal residence.

I expect to get a 1099A. I don't plan to pay taxes. If they audit me, I think I have pretty good arguments as to why it isn't taxable income. Worse case, if they make me pay taxes, I'm still better off than owning that home. I guess we'll all find out in about 6 months!!
 

InTheDeepEnd

LoanSafe Member
Nov 6, 2009
22
0
0
Sorry for the confusion I meant to write a majority of the past FIVE years, which is still not entirely correct. Based on the use/ownership rules, IRS Publication 523 establishes a primary residence test as follows:

"You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 x 2) during the 5-year period ending on the date of sale."

Hope this helps ease your worries about moving out before completely foreclosing on the house. Searching around the internet, it seems like common sense prevails (for once) when it comes to establishing your primary residence.
 

KFish

LoanSafe Member
Oct 27, 2009
964
5
0
San Diego, CA
Well....I sure thought everything was perfectly clear. After this discussion, I am questioning things. I got my info from my tax man (California, been in business a long time, also a financial advisor) and the AZ attorney who specializes in real estate law.

To clear it up, at least for me...I am going to call the attorney on Monday. Although we are not upside down as much as some, it is enough to make a huge difference for us come tax time. We wont be dealing with it until early 2011, when we do our 2010 taxes...but I feel it is something I need clarified now.

Again...as I understand it...our properties will be sold at trustee sale (eventually sometime in 2010) and they will sell for less than we owe. Because AZ is a non-recourse state, the lender cannot come after us for the difference..they will forgive the debt, resulting in a 1099. Since they are not primary residences, they do not qualify for the federal mortgage forgiveness act. We will then pay taxes on the amount forgiven...which my tax man says will be offset by our several years of unclaimed losses.

I am determined to get a difinitive answer on this...my hunt will begin next week....
 

StuckInAZ

LoanSafe Member
Aug 22, 2009
110
2
0
KFish -Do let us know what you find out. If I was in your situation though I would ask the following question to my tax guy:

"Even though I do not qualify for the new primary residence exclusion introduced by the Mortgage Forgiveness Debt Relief Act of 2007, since all my loans are non-recourse, then I should still qualify for the existing non-recourse exclusion that existed prior to the passage of this new act and thus should have no cancellation of debt income tax consequences due to the foreclosures on my properties? Since, I will certainly not have a gain due to being underwater, there should be no tax consequences whatsoever resulting from the lenders' cancellation/forgiveness of this debt?"

I would expect your tax guy to agree with this and confirm these questions. I would then ask him if you were to receive a 1099-C, how do you file that come tax time. Because Form 982, does not have a checkbox for the non-recourse exclusion.

Here is the wording of the non-recourse exclusion from the IRS document:
"Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences."

The only other tax consequence would be potential for a gain, but we all know that we certainly don't have that situation.

For me, I expect my property (a principal residence) to go to trustees sale sometime in 2010 and it will sell for less then what I owe. Because my loan is a purchase money loan, it qualifies under the existing AZ anti deficiency law and it is treated as a non-recourse loan, thus the lender cannot come after me for the difference. They will forgive/cancel the debt, resulting in a 1099-C to me. Since this is my primary residence, I will do everything necessary to ensure I qualify for the newly added Primary Residence exclusion in the MFDRA. I will fill out Form 982 and check the box for the Primary Residence exclusion.

Note: if for some reason this was not my primary residence or did not qualify under the definition of a primary residence, I would still expect to have no tax consequences because the loan is non-recourse, I just don't know exactly how that would be filed to appease the IRS. Remember non-recourse status is a state by state thing and most lenders and the IRS operate at the Federal level, which can make things complicated when determining which loans qualify as a non-recourse loan. The end result is the same, it's just a little bumpier road to get there.
 

KFish

LoanSafe Member
Oct 27, 2009
964
5
0
San Diego, CA
I just spoke to a friend of mine that walked away from 4 rentals last year. They all sold at trustee sale January of 2009. He said his accountant told him he would get 1099's and have to pay taxes on the COD. I read him the posts and he is now wondering the same thing...

What EXACTLY does a property have to do to qualify to be labeled as a "non recourse loan?" My properties have a sale clause...is that enough? Or is there more? Definately something we need to get clarified!!!

I will call my tax guy on monday...and the attorney and do my best to find out. And like the above posts says...just because you see an attorney and consult everyone, doesnt mean things are clear!
 

AZrebound

LoanSafe Member
Nov 12, 2009
12
0
0
After reading this forum over the past couple months, I am planning on missing my mortgage payment for the first time 3 pays from now as I am going to bail on the mortgage. However, I would also like to not pay the property tax on it. The next semi-annual scheduled payment is 4/10 for $1,575. The current balance in the escrow account is $965. Do they use the escrow balance to pay the property tax? If so, does anyone know if I am able to withdraw the balance amount before the property tax is paid? Thanks
 

knownick

LoanSafe Member
Apr 16, 2009
704
9
0
The current balance in the escrow account is $965. Do they use the escrow balance to pay the property tax? If so, does anyone know if I am able to withdraw the balance amount before the property tax is paid? Thanks
Yes, the main purpose of the escrow/impound account is to pay the property taxes.

No, I would be extremely surprised if there was any way you could withdraw this money. The whole point of these accounts is so the bank can ensure that the property taxes get paid. They're not going to just hand it over to you on your good intentions.
 

StuckInAZ

LoanSafe Member
Aug 22, 2009
110
2
0
I'm pretty sure you need permission to close an escrow account. It's been my experience that most lenders require certain thresholds to be met to either close an existing escrow or not open one to begin with (say with a refi). For example, a lender may require a 75% LTV ratio and ontime payments for 2-3 years before they may consider it. Some charge extra fees or points to do you the favor of paying it yourself as well.
 

StuckInAZ

LoanSafe Member
Aug 22, 2009
110
2
0
What EXACTLY does a property have to do to qualify to be labeled as a "non recourse loan?"
K, not sure if this was a rhetorical question as you probably already know the answer here. I'll just go ahead and throw out my understanding though. This can obviously be really complicated, but for most in Arizona, the minimum is that:

  1. Purchase Money - as checked in the loan docs
  2. 2.5 acres or less
  3. Used as single one-family or two-family dwelling
  4. You didn't sign anything in the loan docs that specifically said it was recourse.
  5. You didn't trash the place on your way out.
 

AZrebound

LoanSafe Member
Nov 12, 2009
12
0
0
Knownick and StuckinAZ... thank you for that information. Unfortunate but will just have to swallow the property tax payment. Looking forward to the calls starting in about 4 days for first missed payment. Will keep posted.
 

camilami

LoanSafe Member
Jun 27, 2009
35
0
0
Knownick and StuckinAZ... thank you for that information. Unfortunate but will just have to swallow the property tax payment. Looking forward to the calls starting in about 4 days for first missed payment. Will keep posted.
You won't have to swallow ALL of it. It's still a tax deduction since you paid it.
 

spinner

LoanSafe Member
Dec 7, 2009
87
0
0
Hi everyone - I'm just getting caught up. The way I understand the tax law, foreclosure on a nonrecourse loan is NOT "cancellation of debt" by definition. It clearly says it is treated as a "SALE" and is therefore subject to capital gains rules. But if there is a loss, there is no gain. And KFish, it says the "adjusted basis of the home" which is typically what you paid for it plus any improvements. And it clearly says nonrecourse loans are exempt.

As for the principle residence issue, the way I see it is most people move before the home completes foreclosure. If someone moves to a rental will they say, "Aha! The first house is no longer your principal resident!" I doubt it. I just happened to move to a house that I purchased, not rented. The old house was never rented out, is too close to be a vacation home, and certainly is not an investment home. It's only use was as my principal residence.

I expect to get a 1099A. I don't plan to pay taxes. If they audit me, I think I have pretty good arguments as to why it isn't taxable income. Worse case, if they make me pay taxes, I'm still better off than owning that home. I guess we'll all find out in about 6 months!!
Hi Cam,

My understanding from the primary/principal residency definition is if you lived in your home .. in your case the foreclosed home .. for at least 2+ years then should qualify.

Spinner
 

InTheDeepEnd

LoanSafe Member
Nov 6, 2009
22
0
0
re: closing your escrow account:

Not sure if this is typical, but before I walked away from my mortgage payments I called and had them close my escrow account. All it took was this one phone call, no questions asked. I told them that was planning to make the payments myself and no longer wanted the bank holding my money for me. They said OK and mailed me a check with my escrow balance. BTW, my mortgage is with Wells Fargo.
 

KFish

LoanSafe Member
Oct 27, 2009
964
5
0
San Diego, CA
Deep End...

You're smarter than me! I sure wished I would have thought of doing that!!

I dont think they would do it now...considering I am 45 days late on everything....good for you for thinking of it ahead of time!!! I'm jealous!!
 

InTheDeepEnd

LoanSafe Member
Nov 6, 2009
22
0
0
KFish-

I believe you are incorrect in assuming this. Although it may be scary to call them, this $$ is technically your money that your are fronting to them for payment of taxes and insurance. This $$ is not used to pay your mortgage. To me, this is just another scam of the banking system. When I closed my account, they had ~$4000 in my escrow account that they were paying me NO interest on. Why would I not just keep that money in my own savings account and draw interest on it until the payments are due? If I do ever decide to buy a house again I will not open an escrow account...I think I am a big enough boy to remember to pay my bills! Long story short, I don't think you are out of line to call and tell them to close your escrow account!! It is still YOUR money!!