Our office received the following email:
“What is the best action to take with an upside-down house? My wife and I bought a house in Vegas and plan on retiring there early. We are in our mid 50s. It is a second home or vacation house for us. We own a house in the Southern California area. We are seriously considering letting go of our second house in Vegas due to our low interest only payment will expire in June of 1010 and the house is almost 60% less than the original price.
What if we decide to stop payment on the house and just let it go? What will be the consequences for this action? Can we be sued by the lender? What other options do we have?
If the homeowner abandons the house and the lender then sells the property in a foreclosure sale for less than the loan amount, there arises the possibility of a “deficiency” judgment against the homeowner. Rules regarding deficiency judgments differ from State to State; hence, individuals in the same situation may have different options or consequences depending on which State their property is located. In. For the State of Nevada, however, lenders do have the right to a deficiency judgment. Thus, abandoning you house may not necessarily clear you of all liability.
The good news for this homeowner, however, is that not all lenders may decide to sue the homeowner for a deficiency judgment. Some lenders do. Some lenders don’t. Some lenders may decide not to come after you with a deficiency judgment as they may decide that additional expense of collecting the deficiency from a homeowner would not be justified by what, if any, they would be able to collect from the homeowner.
The bad news, however, is that even when the lender decides not to enforce a deficiency judgment the homeowner may still not be completely free from liability. In these deficiency cases, the lender may instead issue the homeowner an IRS form 1099 for the deficiency. This means that the deficiency was considered as a “loss” by the lender but is to be considered as an “income” to the homeowner. The net result is that you will now have a taxable income that you will owe Uncle Sam. This may not sound fair as you got nothing out of the transaction, but that is indeed a taxable income under IRS rules.
To be completely relieved of liability, the filing of a bankruptcy petition may or may not be an option depending on the equity the homeowner has on his primary home in Southern California, the homeowner’s family income, his other assets (if any) and other financial factors. Other than that, the homeowner may be stuck with a deficiency judgment or a tax bill. Neither one sounds like a nice result.
Readers should, however, be aware that deficiency judgment rules differ from State to State. In California, for example, extra judicial foreclosure of properties (which is the faster and preferred way to foreclose by most lenders) does not give rise to a deficiency judgment. Likewise, the facts given by our homeowner refers to a second home (and, not a primary home). Taxation rules may differ when a primary home is involved as the Mortgage Forgiveness Debt Relief Act (valid until 2012) makes foreclosure deficiency non-taxable as regards purchase money loans on primary homes.
(DISCLAIMER: material presented above is intended for informational purposes only. It is not intended as professional advice and should not be construed as such. Rey Tancinco is a partner at Tancinco Law Offices, a professional corporation with offices in San Francisco, Vallejo, and Manila. The law office website is at: tancinco.weareph.com/old. Rey Tancinco can be contacted at (800) 999-9096 or (415) 397-0808 or via email at: attyrey@tancinco.com.)
