Hi Pattym5000, Josh brings up a great point that should be thoroughly investigated, but you really should obtain guidance from a tax professional, as this area is not "black and white" in its procedural clarity (is tax code ever simple?).

Please refer to: http://www.irs.gov/taxtopics/tc425.html, which states:

"Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. Unused passive losses are carried forward to all future years. A similar rule applies to credits from passive activities.

Passive activities are trade or business activities in which you do not materially participate. In general, all rental activities are passive activities, even if you do materially participate. You materially participate in an activity if you are involved in the operation of the activity on a regular, continuous, and substantial basis."

Josh's tax professional may be referring to a loophole for Realtors. Again, quoting from the site above:

"Rental real estate activities are not passive activities if you are a real estate professional and meet certain requirements."

Seek the help of a tax professional!

Best, Steve

Just wanted to add to this without regurgitating. Even though the hypothetical 88k loss will be treated as income, you may be able to balance this out by writing off the loss of value of your asset on your tax return. This would only apply to non-owner occupied, so this may work for you. My tax guy told me about this. Check with your tax professional.

Steve gave a great answer, there is one more avenue to also check out. You can try for a loan mod. I have heard that they are giving really super low fixed interest rates(I have heard as low as 2 or 3%). I am hearing mixed messages so you would be the best to decide if that is something for you. If you renter covers most of your mortage payment then that also might be a solution for you. Eventually (it's going to be a while) the value of the home should go back up, history shows us that. Also ask your accountant how this will effect your credit for this avenue and the other solutions. That way, you can get the full picture so you can analize what is best for you!.

Should you need to do a short sale I can help you through the entire process but I hate to see you loose your money and a great potential investment unless you need to. Feel free to contact me if you need anything.

Kindest Regards,
Dianne Hicks
Tarbell, Realtors

Hello Patty,

As Steve and Blaison suggested, it is best to consult a Tax Expert as well as a experienced Real Estate Attorney. Let me know if you need help with any of these and I will be glad to email you some contacts.

Also, if you are looking for a experienced short sale agent in Temecula area, I am your right contact. With over 25 years of real estate experience and working for the largest office in the Valley, I have a team that will help you and I have all the designations you want and the expertiese in the short sale market.

My contact info in in my signature. Feel free to browse my website and contact me by email or phone.


Warmest Regards,

UTPAL 'Paul' PARIKH, Certified ABR,CSP,e-PRO,GRI,SRES,REALTOR
REO & Short Sale Expert - TeamUP
V.P - Membership WCR, SouthWest Riverside County Chapter.


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Steve gave a good answer!! If your loan is recourse then the lender has the right to come after you if it forecloses but you may negotiate with lender for not to follow or forgive the amount in short sale. You need to work with an experienced short sale agent when you do short sale.

You will 1099 but may be you can show as loss when you file your taxes. I'm not an attorney or CPA so consult with CPA or tax attorney for any tax ramification on short sale.

Hi Pattym500, I am very sorry to hear of your situation. I'M NOT A LAWYER OR TAX professional, nor am I aware of ALL the details of your circumstances; however, here's my opinion:

Assuming you sold at current value, the lender would take on a $88K loss. Since this is a non-owner occupied property with a recourse loan as you state, a deficiency judgment to collect the $88K can be attempted if a judicial foreclosure is used. This is not allowed under a trustee sale foreclosure. The predominate method of foreclosure proceedings in CA are via Trustee Sales due to the expense of a Judicial foreclosure.

The forgiveness of debt (cancellation of debt) is treated as ordinary income by the IRS despite the fact that the borrower has received no cash at the time of a short sale or foreclosure. However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, which lasts until 2012, there will be no taxation on this forgiveness of debt.

I think its safe for me to assume you do not want to pay income tax on $88K. So, your options appear to be keeping the property as a rental until it can be sold, or moving back into this former primary residence. In any case, no matter what anyone posts on this subject, your situation should absolutely be reviewed by a RE Lawyer AND Tax professional.

Best, Steve