My question involves a foreclosure in the State of: CA
I am thinking how to deal with my rental property in Merced, CA.
In year 2004, my husband and I purchased a rental property in Merced for $310K. We put approx $40K for down payment. We got a 5 year interest only ARM loan of $170K, and we also borrowed $100K on an LOC we got it out from our primary house.
We can deal with the $100K LOC. My question is on the $170K loan.
The property value dropped down to around $110K this year. We are still paying interest only on the $170K loan. However next April our 5 year interest only payment is up so we will have to pay interest plus principal. Although we have a tenant renting the property now but the rental income is not enough to cover all the expenditures. We cannot afford the payment when we have to start paying principal next year.
If we sell the property now, the value dropped so much that will we have to pay out of pocket approx $60K (170K - 110K) to sell. We do not have that much cash.
If we foreclose this property, Here are the questions I am worrying:
1. The fair market value of the property is only $110K and I owe $170K on it, I will have to claim $60K in income on my federal taxes if the bank can only sell it for its fair market value. Am I correct? what kind of tax consequences will I be looking at? (The property is not principal residence)
2. Is there anyway that the lender can come after me for the difference for a Recourse loan? I heard they can come after me for Recourse loan but I also heard they cannot in CA State. I am confused.
3. If the bank can come after me for the difference later, we shouldn't foreclose it. Do you have other expert advice on my situation?
I appreciate your help and thank you in advance.

