My Strategic Default in Olympia Washington (1st BOA, 2nd Green Tree)

StrategicDefaultInWA

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Apr 19, 2012
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Thanks Vantuckian, I will be checking back in here and updating the thread with information about credit, taxes and possible loans in the future.
 

StrategicDefaultInWA

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Apr 19, 2012
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Well, I received my 1099-C's for both the 1st and 2nd mortgages. With the Mortgage Debt Forgiveness Act being extended to 2017, after my taxes it looks like I will be completely in the clear from this mess. The next thing will be to monitor my credit to see how it rebounds. Not that I care too much, but I'm definitely curious.
 

StrategicDefaultInWA

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WAIT....Plot Twist....I could be in trouble. I could use some advice folks. I can't believe this didn't dawn on me earlier. I short sold my home and assumed I was good to go with the Mortgage Debt Forgiveness Act to avoid a huge tax burden. Of course it only applies to your primary residence. Well it was until I think I made a slightly tactical error....I rented out my house. Of course the MDFA doesn't allow rental properties or investment properties to qualify for protection. So the question is this...."Was my house my primary residence or was it a rental"? I was renting another house to live in, but renting out my house that was being short sold. So, I think I'm in trouble. I will do more research, but I'm pretty sure that the home went from Primary Residence to Rental Property and doesn't qualify. That my friends, could mean big taxes. Wow! More to come....
 

driftwood

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I believe I may wind up in the same boat at some point so I have been researching this point for a while. From what I have found, its essentially unclear exactly what defines primary or principle residence. There are standards defined for different situations, so for capital gains exclusions, principle residence is one that you have lived in 2 years out of the last 5. Ultimately this is really not an easy question to answer if you have rented the place out for a period of time. I have read some opinions suggesting that if you bought a new place and rented out the old one to delay selling into a bad market, you could still define the old place as your primary residence.
 

StrategicDefaultInWA

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Thanks for the feedback Driftwood. I will keep everyone updated here. There are a few things working against me on the MDRA option. First, we weren't in it, second we rented it out and third I claimed 6 months on my taxes for 2014 and need to do it again in 2015. So there is a record of it being rented (yep, I'm one of those honest types). However, we were in it 3 of the last 5 years, out for a year with it unoccupied, then rented it for only 1 year. Maybe the vagaries of the definition will waft my way to allow it to be considered a primary residence still. Also, we short sold it to the renters. Maybe we could consider it a lease to own?
 

StrategicDefaultInWA

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IRS Principle Residence Definition and the Mortgage Debt Relief Act

Well, I did a lot of research and this is what I've found. According to IRS and various tax websites, you can take an exclusion for forgiven debt under the Mortgage Debt Relief act which was extended to 2017. To do this, the home must be considered your Principle Residence or Primary Residence. The rule for determining this is that you must have lived in the home for a total of 2 years or more during the most recent 5 year period up to the day of the discharged/forgiven debt. Then you can exclude up to $250k of capital gains/forgiven debt as an individual or up to $500k if you are filing jointly.

Since I actually lived in my house for 3 years of the most recent 5 years. So it looks pretty solid that we will be able to exclude it all. I had a bit of a shock doing my taxes last weekend when I entered the 1099-C forms for my 1st and 2nd forgiven debt and my taxes jumped up $51,000!!! Yikers!!! Anyway, I may see a tax professional, but I entered all the details into my software and it negated the capital gains tax. So I'm breathing much easier now. For some details, see this IRS publication: https://www.irs.gov/publications/p523/ar02.html
 
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driftwood

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I was hoping someone else would come to the same conclusion. I thought this was the case at least I was willing to take the chance and go with that definition but its nice to hear that someone else come up with the same thought process.

What is interesting though and is still throwing me for a loop is if you use Turbo Tax, one of the questions it asks is "did you rent your home out in 2015?" Not sure I understand why renting out the home matters or not or even applies. I havent done my taxes yet so still just scratching the surface.

Just wondering though did you get a 1099-C with the "personally liable" box checked? Mine was and initially I was going to fight it with the lender but I am not sure it really matters. Technically I am not personally liable since the property is in CA and if they want to hold me personally liable for the debt then they need to judically FC which they didnt.
 

StrategicDefaultInWA

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Apr 19, 2012
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Hey Driftwood....Yes, its comforting that we both came to the same conclusion. It took a little while for me to zero in on the 2 of the last 5 year definition. It turns out in my cause, even if that didn't pan out and I couldn't leverage the MDRA, I could probably get a pass on the tax hit because the debt effectively made me insolvent at the moment prior to the discharge. When I started this whole process, I was basically banking on insolvency as my way of excluding the canceled debt from my income. The MDRA just made it easier.

As for the 1099-C's...yes, both the 1st and 2nd had the "personally liable" box checked. It makes total sense to me since I was personally liable at the time of the debt cancellation. Were you not? Recourse and non-recourse aside, it seems to me on paper both you and I were personally liable for our loans, they were just forgiven.
 

driftwood

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As far as the personally liable checkbox, I have been trying to confirm exactly how that is defined. I am in CA and I dont see how I could be personally liable based on the laws that govern real estate and the FC process. Yes the 2nd was forgiven but being that is was a purchase money, in CA that means it was non recourse. On top of that in CA there is the one action rule which basically means the lender would have to judicially FC to seek a deficiency which the 2nd never did nor would they. So I can't see how I am personally liable unless there is some strange definition for "tax purposes" that I might not be aware of.
 

StrategicDefaultInWA

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I did my taxes and submitted them. I typically do them myself, so I decided to take a swing at it alone without a CPA. I figure the 1099-C's are clear documentation of the forgiveness and my prior address clearly identifies I was in the home for more than the minimum 2 of the 5 years leading up to the forgiveness. So if I get audited, the proof is pretty simple that we qualify for the MDRA. This is hopefully the final chapter in the strategic default book. However, the question will be...."Should we buy again?" Could there a sequel some day?
 
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driftwood

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I did the same. I dont think using a CPA would have helped as I am sure they are split as well on the interpretation of primary residence. Since the MDRA doesnt define the requirements or restrictions on qualifying as a primary residence, I am relying on the only one I could find in IRS documentation. I did find some other opinions that the IRS and lawmakers loosely defined it for MDRA and so long as you can justify the status it could be accepted. In my case I documented my reasoning and filed it away with all my other tax return documentation so if it comes up I have it handy and dont have to dig through everything again.
 

StrategicDefaultInWA

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The Next book in the series, The Credit Rebound....Its been awhile since my last update. Last I posted, I filed my taxes, claimed my debt forgiveness and a year later no audit. So the short sale is in the books. So the update I wanted to pass along is that a year later my credit has rebounded right back to where it was before and higher, since I don't owe on a house and I've paid off all my credit cards. Now we just have a car loan, some money saved and money going into retirement. Its all a great thing. So before the walk, I had never missed a payment and always had "excellent" credit. Now my credit is even higher.

All that to say, I feel like the short sale was the best strategic move for me. There was a fair amount of counsel to not disclose financials and pursue the short sale from posters on this site, however, each scenario is different. In my case, it only costed us a measly 4k to close the short sale, and both the first and second were completely forgiven. Never once was there any indication that our financials would be used against us. What most people worry about in disclosure is that they will find stashed money, but to be perfectly transparent....we had none! If that is your situation, then you really ought to consider short sale vs. foreclosure. There are some good programs out there, but its a bank by bank thing.

Now our credit is up to 780+ on the Credit Karma scale. Next up....going from renter back to home owner?
 

StrategicDefaultInWA

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Apr 19, 2012
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Purchasing another home after a Short Sale....So reality check. I met with a lender today to get pre-qualified for another mortgage. I was able to confirm a previous post on this thread from another member regarding wait periods. After a short sale, without extenuating circumstances, you must wait 3 years for an FHA loan, 4 years for a conventional loan and 2 years for a VA loan. This all assumes that you don't have any extenuating circumstances. Apparently, "I'm was tired of throwing my hard earned money away and lining the pockets of BOA and GreenTree" isn't considered an extenuating circumstance. Its a great reason to strategically default, but not for getting another mortgage sooner. So we wait until August 2018 which is totally fine by me.

So while some folks will say that a short sale carries the same impact as a foreclosure, its largely true, but not 100% true. I think the primary impact is on your ability to borrow again after the event. It appears that the credit bounces back at the same rate after either event or at least that is what other members here have indicated. There is definitely longer wait periods for a new mortgage or other loans after the BK vs. the SS. I'm not 100% sure, but rates might also be impacted more by the BK.
 

driftwood

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Sep 17, 2012
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Purchasing another home after a Short Sale....So reality check. I met with a lender today to get pre-qualified for another mortgage. I was able to confirm a previous post on this thread from another member regarding wait periods. After a short sale, without extenuating circumstances, you must wait 3 years for an FHA loan, 4 years for a conventional loan and 2 years for a VA loan. This all assumes that you don't have any extenuating circumstances. Apparently, "I'm was tired of throwing my hard earned money away and lining the pockets of BOA and GreenTree" isn't considered an extenuating circumstance. Its a great reason to strategically default, but not for getting another mortgage sooner. So we wait until August 2018 which is totally fine by me.

So while some folks will say that a short sale carries the same impact as a foreclosure, its largely true, but not 100% true. I think the primary impact is on your ability to borrow again after the event. It appears that the credit bounces back at the same rate after either event or at least that is what other members here have indicated. There is definitely longer wait periods for a new mortgage or other loans after the BK vs. the SS. I'm not 100% sure, but rates might also be impacted more by the BK.
I believe the wait period is the same for SS or FC without extenuating circumstances. Did they tell it was longer for a FC?
 

StrategicDefaultInWA

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I believe the wait period is the same for SS or FC without extenuating circumstances. Did they tell it was longer for a FC?
Sorry Driftwood, I meant to type FC vs. BK. From what I understand the wait period for getting a conventional loan after FC is 7 years without extenuating circumstances vs. 4 years after a SS. The wait for an FHA appears to be 3 years following FC or SS.
 
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