New Foreclosure Related Legislation

DISCLAIMER: THIS IS NOT INTENDED TO BE TAX ADVICE. FOR TAX ADVICE FOR YOUR SPECIFIC SITUATION, CONSULT WITH A TAX PROFESSIONAL. 

Though my work is lender focused, I frequently receive calls and emails from borrowers who want to know if they can just "walk away" from their loans.

From my previous posts, it is obvious that I work for lenders pursuing judicial foreclosures and deficiency judgments.  (See previous blog entries regarding California's One Action Rule and Anti-Deficiency statutes).  That means that while I can quote verbatim from the statute about which loans are recourse, that does not mean that I know anything about the specific tax consequences. 

In addition to the possibility of a deficiency judgment, the borrowers who cannot meet their loan committments could have tax consequences. 

Generally in short sale situations, the debt remaining is treated as a debt forgiveness--which creates income.  The most interesting piece of new legislation I've seen is the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) which snuck in quietly in late 2007.

If the borrower meets certain criteria, the debt cancelled will not be treated as income for federal income tax purposes.  This act applies to income in 2007, 2008 and 2009.  The catch?

That doesn't solve the state tax consequence.  Since California has not passed a companion law yet, the California Franchise Tax Board likely takes a different view of the situation. 

That might change for next year, but in the meantime--borrowers who are paying to sign up for these "homeowner walk away" from their mortgage should beware.  There is no one size fits all solution.  No one can predict how a lender will choose to deal with a bad loan, or the likelihood the lender will pursue a judicial foreclosure and seek a deficiency judgment.

Comments

[Jonica Bradley]

I have a special needs trust that has about $70,000.00 which was created last December. I also have pretty lousy credit. I want to buy a house. Social Security regulations allow the trust to own title to the house, take out the loan and make the down payment but not pay the monthly payments. My question is regarding the trust taking out the loan. Are there any laws preventing lenders from granting a residential mortgage to an entity rather than a human?
help! at wits end!!

[Foreclosure]

Hey!

Your blog is nice.Thanks for sharing this informative post!

[Daniels Team]

Nice read!

[Baton Rouge Real Estate]

Great information, This can be very usefull....

[Legal Documents]

I imagine you would be getting more of these inquiries with the current state of the economy. Unfortunately a lot of people are going to be doing it hard, for long term ramifications I would suggest trying to hang in there instead of just 'walking away'.
All the best.

[seth caplan]

great blog-
question for you- if california is a 1 action state and a lender agrees to a short sale (as there 1 action), can they as part of that agreement also ask for an unsecured promissory note as well? lest say it is a recourse loan the borrower has that is being short sold.

thanks seth

[Dan]

Besides HR 3648, the IRS says that if the debt is non-recourse that there is no tax liability for the 1099-c Cancellation of Debt Income. Check out your State's laws regarding deficiency and also consult your CPA.

[Tax Jobs]

There are a lot of borrowers who wish they could walk away from a loan whose noose is getting tighter and tighter. I really think that focusing all your efforts into discharging your liabilities should be the proper course of action.

[Martin Peson]

Thanks for valuable information, I just learned something new. Debt Fears

[john beck]

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