Rental Property Foreclosure in California

[Gannuscio]

My question involves a foreclosure in the State of: California

I have an rare situation, so please bare with me.

In early 2007, my wife, my brother, and myself bought a condo in California for $345,000. My wife and I own 50% and my brother owns the other 50%.

In the middle of 2008 my brother got married and we all decided it would be best to rent out the condo and go purchase individual homes. I purchased and home with my wife and my brother purchased a home with his wife.

Right now our monthly payment on the condo is approximately $2500 and we rent it out for $1650. The problem is that we had real difficult time renting the property out and we ended up renting to 4 young college students. I am currently in Iraq and my brother told me that the place has been destroyed. My brother estimated the costs to fix the place to exceed $10,000.

Although I never had any intention of letting this condo go, it seems like it might be the best move for me to make. My brother would have a hard time coming up with half the money to fix the condo. It seems like this condo is about to run me dry and I think it might be best to just deal with the loss and let it go back to the bank.

The questions that I am worried about are the following:

1. If the fair market value of the condo is only $200,000 and I owe $345,000 on it, will I have to claim $145,000 in income on my federal taxes if the bank can only sell it for its fair market value? Or what kind of tax consequences will I be looking at?

2. Is there anyway that the lender can come after me for the difference? I don't believe they can in California but I am looking for some expert advise.

I realize that many people might be against this as they feel like I did the "Buy-and-Bail" but I really did have intentions to rent the place out and keep it until I could atleast unload it for what I owe on it.

I would appreciate any expert advice on my situation and thank you in advance.

[OhMy]

My question involves a foreclosure in the State of: California

I have an rare situation, so please bare with me.

In early 2007, my wife, my brother, and myself bought a condo in California for $345,000. My wife and I own 50% and my brother owns the other 50%.

In the middle of 2008 my brother got married and we all decided it would be best to rent out the condo and go purchase individual homes. I purchased and home with my wife and my brother purchased a home with his wife.

Right now our monthly payment on the condo is approximately $2500 and we rent it out for $1650. The problem is that we had real difficult time renting the property out and we ended up renting to 4 young college students. I am currently in Iraq and my brother told me that the place has been destroyed. My brother estimated the costs to fix the place to exceed $10,000.

Although I never had any intention of letting this condo go, it seems like it might be the best move for me to make. My brother would have a hard time coming up with half the money to fix the condo. It seems like this condo is about to run me dry and I think it might be best to just deal with the loss and let it go back to the bank.

The questions that I am worried about are the following:

1. If the fair market value of the condo is only $200,000 and I owe $345,000 on it, will I have to claim $145,000 in income on my federal taxes if the bank can only sell it for its fair market value? Or what kind of tax consequences will I be looking at?

2. Is there anyway that the lender can come after me for the difference? I don't believe they can in California but I am looking for some expert advise.

I realize that many people might be against this as they feel like I did the "Buy-and-Bail" but I really did have intentions to rent the place out and keep it until I could atleast unload it for what I owe on it.

I would appreciate any expert advice on my situation and thank you in advance.

1) You will NOT have to claim the approx $145,000 on your income tax as a 1099-C (cancellation of debt) is not being done in 2009

Here is a link to the new law;

http://turbotax.intuit.com/tax-tools...rbotax/article

2) If your mortgage was a purchase money mortgage, meaning, if you used this loan to purchase the home and you NEVER refinanced it, then you are correct. In California they can not come after you for a deficiency judgment on any purchase money mortgages.

[Gannuscio]

1) You will NOT have to claim the approx $145,000 on your income tax as a 1099-C (cancellation of debt) is not being done in 2009

Here is a link to the new law;

http://turbotax.intuit.com/tax-tools...rbotax/article

I went and read this article and the article specifically states that you do not have to claim the income IF if it your primary residence. What if this is no longer my primary residence but was originally purchased to be?

[non sequitur]

It sounds like you had a nonrecourse loan. The foreclosure will be treated as a sale of the property. The proceeds will be the amount of debt immediately prior to the foreclosure. The basis will be your total acquisition cost.

Since you did not refinance, the acquisition cost probably exceeds the debt amount immediately before the foreclosure. You will therefore have a loss.

[Gannuscio]

It sounds like you had a nonrecourse loan. The foreclosure will be treated as a sale of the property. The proceeds will be the amount of debt immediately prior to the foreclosure. The basis will be your total acquisition cost.

Since you did not refinance, the acquisition cost probably exceeds the debt amount immediately before the foreclosure. You will therefore have a loss.

Sequitur, Thanks for the reply.

I do believe that I have a nonrecourse loan but I am worried about the tax consequences.

The value of the condo right now is $200,000 but I bought it for $345,000 about two years ago and it now a rental.

I am worried about the potential $145,000 I will have to claim as income for the 2009 year.

Do you know anything about the insolvency exclusion and how it works? Paying taxes on $145,000 might be worse then figuring out how to keep the property.

[non sequitur]

There is no cancellation of indebtedness income on a nonrecourse loan, so you have a loss on the foreclosure of your rental property.

[Gannuscio]

There is no cancellation of indebtedness income on a nonrecourse loan, so you have a loss on the foreclosure of your rental property.

non sequitur,

Once again thanks for the quick reply,

I am a little confused on what you mean I will have a loss on the foreclosure?

Can you explain what you mean by this a little more?

I would greatly appreciate it

Thanks

[non sequitur]

Maybe I'm confused. Did you borrow 100% of the purchase price? Is your loan amount increasing?

If the purchase price of the property was $345,000, then your basis would be $345,000 and your adjusted basis would be (345,000 - depreciation).

If you made a down payment or have been paying down the principal, then the loan balance should be less than $345,000.

The loan balance minus the adjusted basis would be the gain or loss. If you made a down payment, then you probably have a loss.

If you bought for no money down, it is possible that your accumulated depreciation exceeds the amount by which your reduced your principal and you would have a gain.

[Gannuscio]

Maybe I'm confused. Did you borrow 100% of the purchase price? Is your loan amount increasing?

If the purchase price of the property was $345,000, then your basis would be $345,000 and your adjusted basis would be (345,000 - depreciation).

If you made a down payment or have been paying down the principal, then the loan balance should be less than $345,000.

The loan balance minus the adjusted basis would be the gain or loss. If you made a down payment, then you probably have a loss.

If you bought for no money down, it is possible that your accumulated depreciation exceeds the amount by which your reduced your principal and you would have a gain.

Non Sequitor,

I did put $0 down on the house. My CPA told me that I would be responsible to pay incomes taxes on the difference between my mortgage of $345,000 (10 year interest free loan) and the selling price (Value right now is $200,000) if it got foreclosed on because it is a rental.

Is she confused?

As far as depreciation, this will be the first year (2008) that I claim it as a rental on my tax return.

Thanks for all the help!

[non sequitur]

It sounds like a wash. The proceeds from the foreclosure will be the unpaid balance of the loan. The basis will be the original cost.

Basis should be reduced by the depreciation. The same amount will be deducted on Schedule E.