short sale vs foreclosure - California

Submitted by Katie from CA - 12/05/2011 - 5:17am

Thank you Sean and Michelle and Bob for your invaluable advice.

I'll keep this short.

Background:
Bought a condo in 2008 for $230K from Indymac (now One West Bank). I owe $220K on the loan. Zillow currently values my condo at $160 - $190K. So it's 30 - 60k underwater if zillow's accurate.

I got married 2009 and my husband purchased a different home also in 2009 that we plan to continue living in.
(I'm the only one on the condo loan, he's the only one on the current home's loan)

I need to lose the condo because it costs me $800 a month and I just got laid off.

QUESTIONS:
If I foreclose, won't it take longer (which would be a GOOD thing as I have some rental income coming in on it)?
Can the bank or a creditor come after me for the deficiency if I foreclose?
Will the IRS still tax me on the deficiency if I foreclose?
(note that I am at peace with ruined credit from a foreclosure)

THANK YOU FOR ANY GUIDANCE!!!!

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Comments

Submitted by Michelle - 12/05/2011 - 1:53pm

Hi Katie,
It does not sound like you refinanced the loan so this is a purchase money/non recourse loan. Even if you had refinanced CA has a One Action rule and the foreclosure would be the One Action. Homeowners get into trouble when they have a 2nd mortgage. You are not at any risk for any deficiency issues with one loan.
If this home counts as your primary residence then you should not have any tax implications. You would want to talk to your tax preparer. There are several ways to reduce or eliminate any tax consequence.
The one issue that can potentially chase you down is the HOA dues. If the property goes to trustee sale the lender will only pay the dues from the date of the sale. The HOA COULD come after you after the fact to collect on the past due HOA dues.

Submitted by katie - 12/07/2011 - 9:17pm

Thank u michelle! One follow up question. The condo is not considered my primary residence; I have a renter living there. If I foreclose do u know if the irs can/will tax me on the deficiency?

Submitted by Michelle - 12/08/2011 - 10:26am

Hi Katie,
Any write off of debt creates a potential taxable event. In the case of your house there are numerous ways that a tax preparer can "knock down" or eliminate any tax consequence. If the property qualifies as your primary residence, if you are insolvent by IRS standards etc. Just make sure you disclose this information to your tax preparer so that they can deal with this in the tax year of the event. I have seen people ignore this on their taxes and years later it becomes an issue.

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