Short Sale / Foreclosure of rental property, that was primary residence for 5 years.

Asked by batata.chal, Concord, CA Sun Feb 17, 2013

I bought house for 750000 in 2005. Bank offered loan with Heloc of 87k as down payment. In 2010 I moved to different house and put above said house for rent. I am loosing $700 per month. As I was still current on payment, bank denied my short sale. Now I have stopped payment and will stop payment for Heloc too.
Current house price is around $400000. As this property will be considered as investment property, what kind of consequences may arise for short sale or foreclosure? (Bank will lose around 180K)
As a rental property, adjusted gross for this house should be negative. Is this true? – How should I calculate this?
Can Bank come after my asset for second loan? I think they cannot as they have offered the Heloc loan for purchase money down. I have never refinanced.
If I close short sale within 3 years since I made this as rental property, can I get advantage of debt relief act? ( 2 years out of 5 years stay as primary residence?)
If not, is it possible to do 1031 exchange?

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Web reference:


Pacita Dimac…, Agent, Oakland, CA
Sun Feb 17, 2013
Here are links for you to read

Short Sales: 10 common myths…

Short sale vs foreclosures -- the Banks' preference…

So much good info out there!
1 vote
Bob Georgiou, Agent, Danville, CA
Mon Apr 15, 2013
It's hard to be precise in spite of some terrific information provided. Your tax situation is complicated and since there are other income and asset considerations, regardless of that the law states I'm not sure that the information that is available to us would be of any use. For instance did you buy this home using a 1031 exchange?

What I can tell you is that whatever the consequences, there is no profit and the tax consequences in almost every case I've seen is worst in a foreclosure relative to a short sale. You are probably not eligible for any debt relief as an owner but depending on your basis that 180k deficiency will and can be reduced depending on a variety of individual factors.
0 votes
Judith Myers, Agent, Walnut Creek, CA
Mon Feb 18, 2013
Getting professional legal and tax advice is key. I've handled a number of short sales for clients in similar circumstances (former residence now rental) and lenders have settled the debt for less than the amount owed. But there may still be a substantial tax liability that could be avoided with a different course of action. Check on your specific facts with an expert before you make a move.
0 votes
Craig Lawler, Agent, Concord, CA
Sun Feb 17, 2013
Realtors are not allowed, nor qualified, to give tax or legal advice, which is what you are asking about.

You should consult a legal and tax professional to assist you.
0 votes
Barbara Wils…, Agent, Danville, CA
Sun Feb 17, 2013
you are way past getting the advice of a realtor. you need either a real estate attorney, or a tax advisor who specializes in real estate. there are serious tax consequences to all your alternatives that realtors should not advise upon...and are not qualified to advise upon. i know a great real estate attorney that i woukd strongly recommend you talk to. i get nothing from recommending him to you, but you can get the best advice for protecting your present and future. I cannot word this more stongly. Get professional tax/real estate legal (Attrorney) advice...Please.
0 votes
Wes Knapp, Agent, Concord, CA
Sun Feb 17, 2013
Ton of questions for a forum like this, might be best to schedule an appointment with a real estate agent.

If you get foreclosed on, yes the second loan (heloc) could come after you for a settlement. Mortgage relief debt act expires 12/31/2013. I strongly suggest you short sale your property, opposed to foreclosure.

Thank you,

Wes Knapp
0 votes
Pacita Dimac…, Agent, Oakland, CA
Sun Feb 17, 2013
Best thing you should do is engage a realtor who has successfully listed and closed short sales --- including investment property that used to be the primary residence.

My clients did the same thing --- bought a house in Alameda, then bought another house in Martinez. They couldn't get enough rent money to cover the mortgage on the first house. Since their financial circumstances have changed due to hardships, they qualified to do a short sale.

If you can do a short sale, that will be better than letting the property foreclose. Too many reasons to list in one short response as to why short sale is your best bet at this time.

Yes, you should be able to take advantage of the Mortgage Debt Forgiveness Act which was just extended through end of 2013 (California legislature still has to meet to mirror this act in the state).

I can send you some information to review, including samples of hardship letters, financial worksheets (income vs expenses). Who is the bank?

I'd like to help even if it's just to get you start thinking short sale instead of foreclosure....
0 votes
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