Foreclosure in San Jose>Question Details

Bryan Ware, Home Seller in San Jose, CA

Should I forclose on my old home that is worth less than I owe?

Asked by Bryan Ware, San Jose, CA Sun Oct 21, 2007

I owe $540k on a house thats requires some work to rent or sell. I have a new house ergo unaffordable mortgages. I'd be lucky to sell for what I owe (then there are closing costs). It probably would sit on the market a while too. Oh yeah, my 5 year loan expires in Dec. I would be losing money to try to sell. Renting would requre re-finance as a second home. If I forclose, will I be taxed on what I owe for the 1st and 2nd loan? I know if we sell, there's a $500k tax exemption. Also, can the banks lien on my new home?


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Bryan, Rebecca is mistaken. The House voted 2 weeks ago to make the difference (loss) untaxable. Check government resources. Amir has provided you with material that may be a good start but, it is a bit dated. The Federal changes are sometimes slow to make the media. BE proactive in any case. Do not wait any longer to take some action.
3 votes Thank Flag Link Tue Oct 23, 2007
You sound like you are deep in debt and I would give them the keys and take a walk. You will never climb out of it. In fact you will sink only deeper in the next year or so. I would not listen to people in the business they created the problem and now want the individual to pay. Look at your overall debt and how much of a drop and output per month. If you are way over 100,000 then let it go. Your credit will be fine in a could of years.
1 vote Thank Flag Link Tue Oct 7, 2008
Hi Bryan, if you read an article on my blog by Tom Cortesi, hopefully you'll be able to answer your qestion.…
0 votes Thank Flag Link Sun Oct 21, 2007
Refer to:,,id=174022,00.html

Special Web Section Unveiled for Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many

IR-2007-159, Sept. 17, 2007

WASHINGTON — The Internal Revenue Service unveiled a special new section today on for people who have lost their homes due to foreclosure. The IRS also reassured homeowners that, although mortgage workouts and foreclosures can have tax consequences, special relief provisions can often reduce or eliminate the tax bite for financially strapped borrowers who lose their homes.
The new section of includes a variety of information, including a worksheet designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them. For those taxpayers who find they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS. . In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due using an offer-in-compromise.

The IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.

Under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. But a special rule allows insolvent borrowers to offset that income to the extent their liabilities exceed their assets.

The IRS cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of property given up through foreclosure. Though the winning bid at a foreclosure auction is normally a property’s fair market value, it may not necessarily reflect its true value in some cases.

The IRS urges borrowers to check the Form 1099-C carefully. They should notify the lender immediately if any of the information shown on their form is incorrect. Borrowers should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for their home (Box 7).

The IRS also reminds lenders of their obligation to provide accurate information on the Form 1099-C. By law, the lender must send a copy of this form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure are based largely on the information reported on this form, and whether it conflicts with information provided by the taxpayer on their federal income tax return.

The IRS normally initiates these follow-up contacts by sending the borrower a notice. The tax agency urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.

Related Item:Questions and Answers on Home Foreclosure and Debt Cancellation

Foreclosure Resources for Consumers
If you are having difficulty making your mortgage payment, one of the most important things you can do is seek assistance. The following resources provide information and links to agencies and organizations that may be able to help you.

Department of Housing and Urban Development (HUD)
Housing Counseling Agencies
How to Avoid Foreclosure (82 KB PDF)
Tips for Avoiding Foreclosure
Federal Housing Administration
You Can Avoid Foreclosure and Keep Your Home
Federal Reserve System
Putting Your Home on the Loan Line Is Risky Business
Federal Reserve Education - Foreclosure Resources
Federal Trade Commission
Credit & Loans
Credit Repair: Self Help May Be Best
Mortgage Payments Sending You Reeling? Here's What to Do
Internal Revenue Servicen
Homeowners Who Lose Homes; Foreclosure Tax Relief Available to Many
Questions and Answers on Home Foreclosure and Debt Cancellation
NeighborWorks® America
Center for Foreclosure Solutions
NeighborWorks® America Organizations Locator
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Last update: September 20, 2007
0 votes Thank Flag Link Sun Oct 21, 2007
Bryan seems like you are in tough situation, too many options to reply in a quick answer. You are going to have to sit down and consult with a team of trusted professionals and talk about your options. You shoudl contact a realtor in the event you might opt to short sale the property. You will also need to talk to your tax professional and work out the consequences in real terms, not i think or they say terms.

You also need to ask yourself what are your most imprtant concerns, meaning is your credit important to you or are you fine with hurt credit. There are many different questions that need to be answered to give you a better answer. Have you refinanced the house or is it all purchase money. Did you buy this house owner occupied. Are you in hardship, or is the adjustable the reason for concern. Are you already Late on the payments?

Your best bet contact a realtor in your area that is a specialist in short sales, talk to the bank and see if you can qualify for a loan adjustment. You have options just take the time to educate yourself and you will be able to make the right decision.

If you need help drop me a line i can refer you to a specialist.

Good Luck.
0 votes Thank Flag Link Sun Oct 21, 2007
You need some financial advice from a CPA. There are all kinds of issues and tax implications for what you are considering.
Web Reference:
0 votes Thank Flag Link Sun Oct 21, 2007
Bryan, If at all possible, try to avoid the foreclosure. There are a "can of worms" that people often don't realize. Are you sure you can't rent it out, and make the numbers work for you to keep both homes? The prices will come back up- and you will be happy you have it when they do. Before making any rash decisions talk to both your tax expert, and the lender, to see what you might be able to do.
0 votes Thank Flag Link Sun Oct 21, 2007
If the bank forcloses, you will be taxed on the difference between what was paid off and what was owed, including any back taxes, cost of sale etc. It will be the same as income. You can try to do a voluntary forclosure which saves money rather than one initiated by the bank. The $500,000 exemption is only for capital gains, which you will have zero of if the home sells for what you owe. I would suggest trying to renegotiate your loans with the bank and renting it out. The real estate market is cyclical and it will come up again. Once you have a foreclosure, you'll have a harder time purchasing another home.
0 votes Thank Flag Link Sun Oct 21, 2007
The reason you don't want to have your home foreclosed on is because it will ruin your credit. What happens the next time you want to refinance, buy a car or apply for a job? Do you have credit card debt? Once your credit card companies find out you have a foreclosure on your record, they could raise your rates to 18% or more. What you need to do is talk with your lenders and negotiate a settlement. You need to hire a Realtor that know how to price your home to sell and handle a short sale.

Good luck.
0 votes Thank Flag Link Sun Oct 21, 2007
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