Kiwisan, thanks for sharing your situation with me offline and agreeing to having me post our interaction here in order to potentially help others in the same situation and have other professionals add to the discussion. -Steve:
Sent: Thursday, September 25, 2008 12:18 PM
Subject: Trulia Q..
This is "kiwisan" from trulia.com. Thank you for your reponse to my post earlier.
1) I have two rental properties in the Sacramento area. We may need to short sale/foreclose on one of the two properties but am concerned that the banks may come after our other rental property or even our primary residence here in the bay area.
Equity was taken out of the first rental to be put down on the second (so a possible short sale/foreclosure should be dealing with two different banks). My job relocated to the Bay Area and the mortgages are proving to be too much now.
2) If we short sale/foreclosed on both properties is that seen as "one event" (due to current financial hardship) or are we going to be "penalized twice" from a bank/credit agency stand point? (ie: 5 yrs for one foreclosure, now 10 yrs for both houses?)
3) Tax concerns: once properties are deed-in-lieu-of/foreclosed, when am I no longer responsible for property tax for the property?
I am seeking legal guidance on how to best handle this situation and whether someone with short sale/foreclosure experience can help us negotiate this w/the banks to rid our debt. Thanks for any advice.
Hi Kiwisan, first I'm sorry to hear of your situation and I hope the information below helps you navigate to the best solution possible for you and your family. Please keep in mind that I am not allowed to provide you legal advice, and you should not construe anything I am about to share as legal advice.
1) Regarding the rentals, whether Short-Sale or Foreclosure, you should know that either will probably result in a taxable event under the IRS "debt forgiveness" rule. Meaning, the banks will allow the sale, but you will be 1099'd for the difference, and the IRS will expect payment for this "phantom income." This would not apply if we were talking about your primary residence On 12/20/07 President Bush signed into law a bill passed by Congress: HR 3648 â€“Mortgage Forgiveness Debt Relief Act of 2007. One major point covered: Elimination of the â€œphantom taxâ€ on foreclosures, short sales or other discharges of debt on a primary residence. Consider this scenario: A property is worth $250,000, and the mortgage balance is $300,000. Under the old rules, if a lender forgave the $50k difference as part of a foreclosure, short sale, refinance or loan modification, the borrower had to claim the $50k as income and pay federal income taxes on that amount. The new law eliminates this â€œphantom taxâ€, and the forgiven debt is no longer treated as taxable income to the borrower as long as certain requirements are met, such as the discharged mortgage balance must be on the taxpayerâ€™s principal residence.
Going after the primary residence gets tricky. California is a non-recourse state, which normally means they can't come after your primary residence: Read more here:
You might also consider trying to renegotiate your loan interested rate with the lender(s), but you will have to invest a considerable amount of time communicating with them.
2) You will be "penalized" twice from a credit perspective as each loan will show as an account that went into default. The affect on your actual score will last for two years; however, the derogatory note(s) that an underwriter will be able to see will last for 10 years.
3) Please refer to the Q&A link provided above.
I think it best to find a Real Estate/Tax Lawyer to help you. Try http://www.avvo.com/
to zero-in on someone that you would like to work with.
Hope this helps. -SteveO