California Foreclosure, Not Owner Occupied

[niceshoes]

My question involves a foreclosure in the State of: California

5% down, 600k purchase price
80% first with Wells
15% second with Chase

First and foremost, this forum has been a great help, so thank you. I purchased my home in May 2007 and ended up moving out of the area for a new job in July 2008. I have renters in the property now, but am upside-down $1700 a month on the mortgage. Given that I am unable so sell the property and our combined household income doesn't allow my family to take any advantage of mortgage interest tax deductions, this property is a serious financial anchor ($20,000+ loss annually).

- Both loans are original, purchase loans.
- Loan docs state "principal residence"

My question is: Being that I no longer occupy the residence, will this effect the recourse/non-recourse status of either loan if the home is foreclosed on?

Any help would be greatly appreciated. Thank you.

Best regards,
NS

[OhMy]

My question involves a foreclosure in the State of: California


My question is: Being that I no longer occupy the residence, will this effect the recourse/non-recourse status of either loan if the home is foreclosed on?

Any help would be greatly appreciated. Thank you.

Best regards,
NS

Just be sure that you have proof that you lived in the home for 12 months. Save old utility bills, any credit card bills that came to your address, etc.

As far as the deficiency judgment you will be in the clear if they sue you.
However, you will be subject to a 1099-C cancellation of debt as the home was rented when it was foreclosed and not owner occupied.

You will have to pay income tax on the amount of loss the bank takes when the loan is foreclosed and the home is re sold.

Here is a link to the law;

http://turbotax.intuit.com/tax-tools...ship/5512.html

[niceshoes]

Thank you OhMy. My understanding is that even with a 1099-C, IRS Form 982 will provide me an exemption from this 1099-C as my debts exceed the value of my assets. Is that a correct interpretation?

Much appreciated.

- NS

[OhMy]

Thank you OhMy. My understanding is that even with a 1099-C, IRS Form 982 will provide me an exemption from this 1099-C as my debts exceed the value of my assets. Is that a correct interpretation?

Much appreciated.

- NS

The 982 will cancel out the 1099-C. However, since you rented the property out for the past year or so this may not be true. The new law only applies to the owner occupied houses.

A tax expert can answer this better for you. I am well versed in foreclosure but when it comes to taxes, that is not my thing.

[niceshoes]

Thanks OhMy.

[solara1973]

The home is in California and the original loan was a non-recourse loan since it was purchase-money and owner-occupied.

Even if the owner moves out and rents it out, it should still be a non-recourse loan - the terms of the loan don't change just because they moved out and rented it out.

What is a non-recourse loan?
Any loan that is purchase-money (has not been refinanced) on an owner-occupied 1-4 unit dwelling. This definition applies to both 1st Trust Deeds and 2nd (junior) Trust Deeds. A non-recourse loan is very favorable because the lender's only recourse, in case of default, is the property itself. The lender cannot pursue the borrower for a deficiency judgment or attempt to collect money or any other asset from the borrower.

What is a recourse loan?
Any loan that is not non-recourse, including all refinanced loans, equity lines of credit and loans used to purchase rental property. This includes rate & terms refinances where no cash was taken out. In case of default, the lender is not limited to taking the property back and the borrower may be personally liable on the debt. In California, any recourse loan that is foreclosed on non-judicially through a Trustee Sale, becomes non-recourse.

So if it's a non-recourse loan, there should be no 1099-C issued, and no Cancellation of Debt and subsequent income tax hit, right?