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Old     (guido)      Join Date: Jul 2002       12-02-2011, 10:57 AM Reply   
Hey guys... here's the long/short of it. We bought a house 8 years ago. Re-fied and pulled $60k to remodel said house. We lived there for 5 years and when the market turned to crap we bought a nicer place with the intention of renting, then selling that place when the market came back. Now the market is worse than ever and the house is over $100k in the hole. All we really want to do is get rid of the house. We've got a short sale negotiated with the bank on the first and the second, having never stopped paying the mortgage.

Now the dilemma: My understanding is that the federal government will forgive the difference between what you owe and what you sell for if you've lived in the house for 2 of the last 5 years. By the time we got the house into escrow we were 1 month past that threshold.

What do we do here? My understanding is that we'll be taxed on the difference like it was income. Probably end up paying $30k plus in taxes on that. Because the loan adjusted down we are currently making a few hundred a month in rent on that house, but the bank wont fix the rate at the low interest we're currently getting. I expect that before the LTV comes back the interest rates will raise to the point that we're deeply in the hole on it every month. I hate owning a property that is in the red as a "investment". I'd much prefer to be done with it right now, but I'm not sure it makes sense. Income wise we're screwed. We make too much to depreciate the house or write off any part of it except some mortgage interest.

We could go the shiesty way and stop paying and keep collecting rent until the bank finally takes the house back. Then use the rent money to pay the IRS back on the taxes. If we're going to screw our credit we'd probably do the same to two houses we have that are underwater, but I'm nervous of being sewed. Fortunately or unfortunately we have a fair amount of money in 401k and the stock market that I'm not sure if they could come after or not.

Anybody been through any of this before and have any advise? I really just want to get on with our lives. We never really intended to hold onto this house. Just wanted to move up, but hold onto this until values came back and we could sell. 3 years later I'm still not seeing light at the end of that tunnel.

Maybe we should just clean out the investments. Take a few years off on vacation, dump all of our houses and start over. hahahaha! At this point I'm feeling screwed for trying to do the "right" thing and not just dumping the house years ago.
Old     (shawndoggy)      Join Date: Nov 2009       12-02-2011, 11:49 AM Reply   
have you spoken with your accountant about this? It's my understanding that accountants are frequently able to apply some invsolvency principles to the investment property to reduce the forgiveness of indebtedness income. You might want to check into that.
Old     (norcalrider)      Join Date: Jun 2002       12-02-2011, 12:10 PM Reply   
Sounds like you're sold on dumping the property but as a rental you can depreciate the value and write off any loss annually thus lowering your overall tax burden as I understand it. Might talk to the accountant about your options here. Might not be a bad thing to keep the bad investment if it isn't sinking your ship.
Old     (diamonddad)      Join Date: Mar 2010       12-02-2011, 12:14 PM Reply   
IMO, doing the right thing is "doing what is best for you and legal". Anything else is foolish.
Old     (guido)      Join Date: Jul 2002       12-02-2011, 12:42 PM Reply   
Shawn, my accountant doesn't want to know specifics in terms of dollars and dates of sale/rental. He's on vacation right now, but we're going to have to get into this with him when he gets back. We'll definitely be talking. He did say that the government is strict on the fact that we have to live in the house 2 of the last 5 years and that it's critical right down to days on the close of escrow. It's my fault not getting into this with him sooner. I thought we'd get it sold sooner and be clear of the critical date.

Mik, there is a combined $250k income threshold on depreciating rental property. I've been down that road. We don't qualify to depreciate. Apparently the government considers us too "wealthy" to get the same tax benefits as the "less-wealthy". (Don't get me started on what I think of tax code).

GD, I now agree. When we moved out of the house we had been riding the down economy for over 3 years. I was sure that the housing market would stabilize to the point that we could sell the house before we ran into this problem.

I'm not sure who I'd rather give the money to. The banks that are being bailed out, or the government directly so they can use it to bail out the banks. I think I'd rather gather it up and light it on fire. At least I'd get some satisfaction out of that. I'm not quite sure how the government considers debt forgiveness by the bank as personal income. It's not like we haven't paid the banks more in interest over the last 8 years than they're writing off in losses. I guarantee they'll be able to write it off as bad debt on their books. Strange how the laws are written to the banks advantage over individuals (not like WW hasn't been over this before).
Old    SamIngram            12-02-2011, 1:53 PM Reply   
Your bank may or may not choose to 1099 you. You could also face a future deficiency action case for the difference between the loan amount and the amount that the bank finally sells the property for. This is one of my largest sources of income, testifying deficiency action cases. It depends on the bank, the amount of the deficiency, etc... You qualify because you had two houses, otherwise the Homestead Act would have probably covered you... BTW, the dirty secret is in this case is the fact that the bank can wait up to 7 years before bringing the case against you.

As far as doing the "right" thing I would suggest reading this book...
Old     (guido)      Join Date: Jul 2002       12-02-2011, 2:55 PM Reply   
"BTW, the dirty secret is in this case is the fact that the bank can wait up to 7 years before bringing the case against you."

^This is what I'm trying to stay away from. I think this is going to be the next big boom for the bankers. Probably create a ton of jobs. The banks wont let their money go easily. People think they're getting of easy right now by forclosing. We'll see.

The second home is a vacation home that I have no intention of getting rid of unless we trash our credit. It's value has been halved, but I still enjoy going there, so I can stick that out. The rented house I had no intention to keep, but I wanted to ride it out to sell it at a wash. Heck, I'd pay some cash in to get rid of it, but it's value is getting hammered by all of the foreclosures and short sales in the neighborhood. The bank accepted an offer that I figure is $100k less than "real" value of the house because that's what the comps are doing right now. I really want to just get clear of it.

Sam, The Homestead act is what Obama passed to wash the "income" from short selling or foreclosing a property that you lived in, right? That's what we're trying to fall under, however it looks like the lines are clearly drawn. In the case that we go that route we will have settled with the bank and wont have to worry about them coming after us. Have you dealt with any cases where people are beyond the threshold of living in the house for 2 of the 5 years? I'd like to do this legit and make sure that I wont have the IRS or the bank coming after me. I'm not sure how active the IRS is on these cases right now.
Old     (brhanley)      Join Date: Jun 2001       12-02-2011, 3:17 PM Reply   
There is a lot of inaccurate information on here. Each state is different and this is a very complicated. Seek professional help. Perhaps an attorney to learn the basic rules in CA and a CPA to learn tax implications. I can give a free lay of the land if you want to shoot me an email.
Old    SamIngram            12-02-2011, 3:31 PM Reply   
No, the Homestead Act or Homestead Exemption has been around for decades and protects part of a homeowner's equity on their primary residence, blah, blah, blah, in the case of lawsuit. In AZ it can and has been used to protect a homeowner from being 1099 up to a point. That was not the laws intent, but that is currently how it is being used. Most states have some form of homestead act or exemption law on the books. Fairfield vs. Wells Fargo was the first case in AZ where it was used.

BCH is correct in that every state is little different. Just the legal differences in a mortgage versus a deed of trust is huge...
Old     (guido)      Join Date: Jul 2002       12-02-2011, 4:39 PM Reply   
Hey Brian, I sent you a a message. I don't have your e-mail address.
Old     (guido)      Join Date: Jul 2002       12-02-2011, 4:40 PM Reply   
Sam, I'm about 1/2 way into that book. Thanks. Very intersting read. Answers a lot of questions I had as to how the whole mortgage and lending industry got to where it did.
Old     (fly135)      Join Date: Jun 2004       12-03-2011, 7:54 AM Reply   
Apparently this guy doesn't understand the difference between a contract and stealing.

But other libertarians argue that it is a personís moral duty to fulfill their obligations: a contract is a contract. To not repay a debt is the equivalent of stealing. The lender held up its end of the bargain by providing the money for the purchase or refinance of the home in this case. Now itís for the borrower to make the payments as the terms in the note dictate.
Business's walk away from debt everyday, yet I never heard a conservative or libertarian bat an eye over business bankruptcy.

I say if you give money to people without doing your due diligence then you've made you own bed. The market principles that the lenders relied on were faulty. The evidence is clear that they knew they were faulty. They built a house of cards and anticipated the fall.
Old    deltahoosier            12-05-2011, 8:45 AM Reply   
I don't think I hear to many conservatives or libertarians batting an eye about people having to make a business decision about individuals having to go bankrupt either. Don't mistake being angry at the game for being angry at the player.
Old     (shawndoggy)      Join Date: Nov 2009       12-05-2011, 9:28 AM Reply   
Originally Posted by fly135 View Post
Apparently this guy doesn't understand the difference between a contract and stealing.

Business's walk away from debt everyday, yet I never heard a conservative or libertarian bat an eye over business bankruptcy.

I say if you give money to people without doing your due diligence then you've made you own bed. The market principles that the lenders relied on were faulty. The evidence is clear that they knew they were faulty. They built a house of cards and anticipated the fall.
And by the same token, the lender and the borrower agreed to a set of rules (the loan documents), the enforceability of which are governed (and sometimes limited) by state law. Those rules generally require a borrower to repay a loan and set forth a quiver or remedies for the lender in the event the borrower defaults.

Guido is doing the right thing by trying to find out what his exposure is in the event he chooses the default option under the loan documents.

As brhanley points out, this issue is very much a creature of state law and what might be true in one state is probably different in another.
Old    SamIngram            12-05-2011, 12:04 PM Reply   
The book is just that, a book. I am always on a plane, train, in the car, or in a hotel room and tend to read a lot. I have read most of the books on Most of them are available for free in PDF form. Most of the books are history related and all of them have a libertarian bent to them. None of those I read do I hate, but I do very much enjoy some. If you like to think, like to learn about history, and are interested in economics or finance I would strongly encourage you to check out the free PDF library. I am currently reading Man vs. The Welfare State by Henry Hazlitt.

The book is described by the author as:

Thisis book examines the background to the case of strategic default
and considers its implications from a variety of different perspectives.
The thesis here is that there is nothing ominous or evil about this practice.
It is an extension of economic rationality.

But what about the idea that our home is our castle? My thesis is
that the essence of freedom is to come to understand that the real castle
is to be found within.
Old     (psudy)      Join Date: Dec 2003       12-05-2011, 12:30 PM Reply   
"Business's walk away from debt everyday"

While filing bankruptcy may allow businesses to walk away from unsecured debt, it does not allow them to walk away from secured debt without losing the collateral put forth. FYI.
Old     (fly135)      Join Date: Jun 2004       12-05-2011, 1:30 PM Reply   
Paul, I'm pretty sure nobody is under the illusion that you can walk away from a home mortgage and keep the house.
Old     (psudy)      Join Date: Dec 2003       12-05-2011, 1:44 PM Reply   
Point was that businesses don't get to walk away from Bank Debt very often and stay in "business." Thats all.
Old     (deneng)      Join Date: Feb 2005       12-06-2011, 10:14 AM Reply   
Evan each state is different, and California is one of the better states. Banks can't come after you for the balance in a foreclosure if it is done by non-judicial means. If your home foreclosed weather it was a rental or not and it was a non-ducial foreclosure the bank would send you a 1099 for the loan foregiveness in a year or so after the foreclosure and you would pay capital gains as that would be concidered income because you do not have to pay it. From what you said your loan was not a primary loan , so the bank may decide to take the judicial route and take a judgement for the difference. The good thing is that they have not been taking the judicial route in California because of costs and length of trials. Check out Loansafe .org for lots of good info.
The live in 2 of 5 year rule was for capital gains, and since there is no profit that would not apply.
If you short sale make sure the bank forgives you for the diference in writting. I am not so sure they will do this. Banks are pushing short sales,and they say it is better for your credit, but what good is it saving your credit when you have a big judgement dificency down the road. Either way your credit is gonna get hit.
No forgiveness from the state or the federal government for taxes you will have to pay on the loan forgivness. Only state if it is a primary residence. You can offset alot of this if you are in debt. Debt includes your underwater mortgages. See an accountant he should be able to calculate that quickly. I can tell you one thing the government will check your assests closely.
Old    SamIngram            12-06-2011, 10:58 AM Reply   
I agree with all that except the part that many banks are going the judicial route, albeit mostly high-end properties. I have testified in 39 to date, with 25 in AZ, 9 in CA, 1 in Mexico, and 4 in Hawaii.
Old     (guido)      Join Date: Jul 2002       12-06-2011, 11:50 AM Reply   
Interesting stuff here. Thanks guys. Having spoken with several accountants and attorneys I think I have a handle as to what I'm up against. I appreciate all of the input.


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