What are tax implications on Cancellat’n of Debt from foreclosure/short sale on non-recourse CA loan 1yr ago?

Question by D U: What are tax implications on Cancellat’n of Debt from foreclosure/short sale on non-recourse CA loan 1yr ago?
This beautiful San Diego home was purchased for $ 471,000 in Jun06, lived in for less than two years, loans (negative amortization 1st: about $ 410,000; and conventional fully amortized 2nd: about $ 94,000) both in California. The seller’s highest received offer is currently $ 360,000 (yes, a $ 111,000 (24%) drop in perceived value in just over a year). Sell is anticipating a large Cancellation of Debt income, as they owe so much more than they can conceivably get in a sale.

Incidentally, Seller had an offer for $ 448,000 just 3 months ago and never reported it to the bank because they were looking to get out of the loan on their own (without short sale), and were not even considering walking away/foreclosure at that time. Where is this market going?

Best answer:

Answer by Landlord
Your initial quesion and detailed question are not the same.

The bank will report a 1099 on the loss, in this case 111,000, plus, on the sale. You were given the money, just lost it. You claim it as income, they claim it as a loss.

The market is dropping due to greedy people borrowing more then they knew they could repay. Some are projecting 1990’s prices, personally I am expecting 2000 prices in the end.

This is not a great time to sell, you would be better waiting this out.

What do you think? Answer below!

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2 Comments → “What are tax implications on Cancellat’n of Debt from foreclosure/short sale on non-recourse CA loan 1yr ago?”

  1. JT

    Aug 24, 2012

    Well, on the non-recourse loan the lender can’t get a deficiency judgment which is a good thing. You obviously are aware of the tax implications of debt forgiveness. The non-recourse nature of the loan won’t help with the IRS. Check out IRS Form 982 and Section 108 of the IRS code. It might be an option. Ask a good tax attorney about it as well, as that option could save quite a bit of money.

    It might be difficult to convince the lender in second position that their loan is completely worthless now. With the previous offer of $ 448k the seller would have only had to work out a short sale with the second lien holder. Unfortunately, by waiting too long, the situation is more complicated now.

    As for the market, I believe we have a ways to go before we see any improvement in California – especially San Diego. The downtown San Diego condo market is severely overbuilt and prices are falling quickly. One large complex in Little Italy has nearly one third of its units in some stage of foreclosure.

    South Bay is another area that has been hit hard and will continue to lose value into the near future. Temecula and Riverside are in bad shape as well. Many of the North county beach communities are holding up fairly well but that may not last.

    The sub-prime loan resets that everyone has been talking about reach their highest volume in October this year so we haven’t seen the worst of it yet. The Fed and Congress will try to alleviate the pain of the market correction as much as possible but the numbers are so large that I don’t think their actions will have much of an effect. I expect a deteriorating market through 2008 and after that it depends upon how the general economy is doing. If we enter a recession – look out below. If not then maybe we will pull out of it. Good Luck!

  2. John Rosa

    Aug 24, 2012

    The seller would be responsible for the forgiveness of debt. However, if he can show through his assets and liabilities, he can provide IRS information that he is insolvent without declaring bankruptcy. Have him call the IRS and ask for a tax law expert regarding foreclosures.

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