I would greatly appreciate some advice on my particular situation:
1. I purchased a home, in Florida, with my father several years ago for $290k. Because of my credit at the time, we received an 80/20 loan and my father is the sole person on the mortgage but we are both on the deed. For what it's worth, the primary loan was with Freddie Mac.
2. I lived in the home as my primary residence and made the mortgage payments to the bank. However, this being Florida, the home quickly became underwater and it is currently valued at less than $100k.
3. Last year I decided to stop paying the mortgages and to negotiate a short sale. At the time, I still owed approximately $280k on the loan(s). The initial short sale offer of $100k was approved by the primary lender. Unfortunately, do to the time it took for the bank to respond, my buyer lost her financing prior to close. The house went back on the market and two days later we received an offer for $135k. This offer has been submitted, but since the service provider on the loan has changed hands, we are in limbo. Originally, the bank was requiring a $5,000 cash contribution from us at closing, would not include a waiver of deficiency in the contract and stated that they may issue a 1099-C.
4. Which brings me to my questions -
a. If the bank(s) issue a 1099-C, are they, in essence, waiving their right to pursue a deficiency judgement?
b. If the bank(s) issue a 1099-C, and this is not my fathers primary residence, would the house needed to have been previously "filed" with the IRS as an investment property in service in order to have the COD considered as ordinary income and netted against the loss on the property? Otherwise, would it be classified as a capital loss and only $3k deductible against ordinary income?
At this point, I am not as concerned about the bank(s) pursuing a deficiency judgement against my father as I am about having to pay taxes on the 1099-C.
Thanks for your assistance
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Replies
Paddy, knowing when and why the banks pursue deficiencies would be very helpful if you would be so kind to share. The statute for pursuing these is also a big question.
Sheila, it is difficult to make a general statement on why and when a deficiency may be sought because the guidelines are not necessarily standardized. However, Wells for example, uses the deficiency waiver to enforce the arms's length agreement...meaning...if someone violates the Arms' length agreement, they are far more likely to get sued for a deficiency
Paddy, that makes perfect sense! It is my opinion too that if their is a junior lien and the monies were used for anything other than improvement on the property, then these deficiencies would more than likely be sought after. Is that accurate?
Sheila, I would not say that this is accurate...that situation comes from the Mortgage Forgiveness Debt Relief Act that President Bush signed into law and it is due to expire on 12/31/2012. The lenders and servicers are not organized enough to perform diligence into the use of funds from a prior transaction
Paddy, what's your thought on HR3648 and if it will be extended or not? And are banks moving more now into just waiving it anyways? Just better public image and how can you pursue someone who still don't have a job... right?
no one really knows whether it will get extended...there does not seem to be indication on it - either way. Banks are not moving away from waiving it...in fact, the trend is the opposite...
Jessica, a 1099-C and a deficiency waiver are two entirely separate things; one has nothing to do with the other. most lenders will not officially waive a deficiency in writing (I am a foreclosure defense specialist and an attorney for Wells and BofA and I could tell you when or why they will seek a deficiency).
b. does not matter but the 1099-c would have to be issues in your father's name only but if you proved that you paid the mortgage, the IRS could transfer liability to you.
I successfully attack the 1099-C on a four prong approach and I back it up with law and audits on your loan...they can be fought and many times, successfully challenged
Paddy Deighan J.D. Ph.D
Honestly, I think you should talk to an accountant. If the IRS deems the property an investment property, you MAY owe taxes. But none of us here are accountants. Call a good one and ask. It's tough to say right now.
As Bryant said the 1099C is when the debt is written off. IMO if the debt is gone, there is nothing to pursue a deficiency on, however, I know others feel differently, AND there is NOTHING from stopping a lender from AMENDING their returns
I found this article for you hope this helps...http://ezinearticles.com/?The-1099-C-And-Cancellation-Of-Debt-From-...
have you considered a hafa short sale with a non profit. organization. given your situation i believe we may be of assistance. give me a call i'd like more details from you. durring a HAFA short sale the lender waives all rights for a deficiency judgement.
619 504 3141-jay grant.
Hi Jessica, The 1099c is an IRS requirement when the lender writes off the debt as a loss. Is it waiving their right to pursue a deficiency? In my opinion, No. But unfortunately there are many different opinions on this subject.
My thought process is that anyone can write off a loss on their tax return. Then if they are able to collect on some of it it becomes income and becomes another taxable event.
In order to get a waiver of deficiency in Florida it needs to be in writing from the lender at time of approval.
Of course I am NOT an attorney nor am I a tax professional.
However this guy is http://activerain.com/blogsview/1153345/table-of-contents-short-sal...