Confusion and foreclosure laws in CA

[seattle-relo]

A few weeks back I posted some questions about foreclosure in regard to a client and his spouse I was seeing in counseling. They are in the process of speaking with an attorney regarding their options. They were very confused about what their attorney told them. And after they described what the attorney said, I admit I was pretty confused – can anyone clarify?

They purchased their house in CA with a 80/20, they have not refinanced – are BOTH loans considered non-recourse?

Will they receive a 1099 from the IRS on the difference between what the bank gets for the house and what they owe? Will they only get one from the second? I was reading on the IRS website that stated a non recourse loan will not result in a 1099, but their attorney states it will????

Most of the confusion is regarding how the second is handled and the 1099 tax implications.

I will not give them any legal advice, but I am curious to know the answers to their questions.

Thanks

BTW, if anyone remembers, a couple of weeks back I was asking about what to do with my mom and housing issues, we decided to look for senior apartment living for her and rent her AZ to cover her rent. Thanks for the suggestions.

[bubba99]

My 25 years buying and selling California real estate tells me that:

The first is almost always non-recourse – the only exception I have run into is fraud.

The second is also non-recourse if it was:
1 purchase money
2 not a heloc (with caveats)
3 does not secure any other non-real estate items like tractors, horses, etc.
4 did not exceed the value of the transaction (money out at closing)

The item 2 caveat is that even if it was a HELOC, if no funds other than the purchase have been used, and the language in the contract does not specifically prohibit standard foreclosure, it may still be non-recourse.

If the house is foreclosed on, there is no 1099. There is no loan forgiveness, the foreclosure cancels the debt not forgives it.

If they renegotiate with the lender, and the lender “forgives” part of the loan as part of a third party sale for a reduced amount, the whole forgiven amount is 1099-ed.

The attorney must believe that the second is going to be forgiven, which is not part of a foreclosure, but another sale, or incentive for the owner to stay and keep paying.

Here is a quote from http://eastbayplus.wordpress.com/
(answers all of your questions and give examples)

“The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee’s sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt.”

[bubba99]

My 25 years buying and selling California real estate tells me that:

The first is almost always non-recourse – the only exception I have run into is fraud.

The second is also non-recourse if it was:
1 purchase money
2 not a heloc (with caveats)
3 does not secure any other non-real estate items like tractors, horses, etc.
4 did not exceed the value of the transaction (money out at closing)

The item 2 caveat is that even if it was a HELOC, if no funds other than the purchase have been used, and the language in the contract does not specifically prohibit standard foreclosure, it may still be non-recourse.

If the house is foreclosed on, there is no 1099. There is no loan forgiveness, the foreclosure cancels the debt not forgives it.

If they renegotiate with the lender, and the lender “forgives” part of the loan as part of a third party sale for a reduced amount, the whole forgiven amount is 1099-ed.

The attorney must believe that the second is going to be forgiven, which is not part of a foreclosure, but another sale, or incentive for the owner to stay and keep paying.

Here is a quote from http://eastbayplus.wordpress.com/
(answers all of your questions and give examples)

“The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee’s sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt.”

[DaCounselor]

Both loans are non-recourse. Even if the 2nd is a HELOC and regardless of any provisions regarding recourse. CA code and case law say if it’s purchase money, it’s non-recourse.

There will be no tax owed due to the foreclosure.

[DaCounselor]

Both loans are non-recourse. Even if the 2nd is a HELOC and regardless of any provisions regarding recourse. CA code and case law say if it’s purchase money, it’s non-recourse.

There will be no tax owed due to the foreclosure.

[Author]

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