Bruce Norris at The Norris Group talks about his upcoming report on the state of the California real estate market.
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If a lender forecloses on my principal residence or agrees to a short sale, will I owe tax on the deficiency?
Generally, when there is either a foreclosure or a short sale a taxpayer will receive either (in some cases the lender may issue both) a federal Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt, that provide the amount of debt cancelled, information to compute gain or loss, and whether the taxpayer is personally liable for the debt.
If you borrow money from a commercial or private lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. In a short sale, the lender agrees to accept less than full payment, and cancels the unpaid amount.
The most common situations when a foreclosure or a short sale does not result in cancellation of debt (COD) income involve a non-recourse loan. A non-recourse loan means the lender’s only remedy in case of default is to repossess the property the lender cannot pursue you personally in case of default. A purchase money loan (that is, a loan taken to “purchase” your home) is generally considered to be a non-recourse loan in California. Refinances, second mortgages, and “cash out” loans are generally recourse loans.
Although forgiveness of a non-recourse loan resulting from either a foreclosure or a short sale does not result in COD income, it may result in other tax consequences, like a reportable gain from the disposition. Even if the debt discharged is non-recourse, a taxpayer may have a gain to the extent the balance of the mortgage forgiven exceeds their adjusted basis of the property.
The gain, if any, from the foreclosure or short sale may or may not be taxable, depending on whether IRC section 121 applies and the amount of the gain. IRC section 121 only applies to principal residences, and limits the amount of gain that can be excluded from income.
If the loan is a recourse loan, then depending on the facts, you may have COD income, and potentially a reportable gain, in which case you would want to determine if one of the provisions in IRC section 108 would apply, allowing the COD income from the discharge of indebtedness to be excluded.
For 2007 and 2008, California conformed, with modifications to IRC section 108 (a)(1) (E) that allows a limited amount of COD income resulting from the foreclosure or short sale of a qualified principal residence to be excluded. However, this exclusion is currently not allowable for any foreclosure or short sale that occurs on or after January 1, 2009. (Note: There is pending legislation that would extend the California exclusion, SB 97 and AB 111.) One of the provisions available in IRC section 108 that might apply is the insolvency rule, which would apply if a taxpayer has COD income and is insolvent (total liabilities exceed total assets); in that case, the exclusion only applies up to the amount of insolvency, (to the extent, liabilities exceed assets).
More information regarding foreclosures and short sales is available at irs.gov. In particular, you may want to refer to the IRS webpage titled “Home Foreclosures and Cancellations”
If your reporting position is audited by California, you should be prepared to provide documentation and an analysis of your facts in support of your position.
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I’d like to introduce my newest listing at 2882 Arlington Place, Fremont, CA 94555.
This home is conveniently located in the Northgate area of Fremont with access to major commute roads, transportation and recreation.
This ranch home has a great, practical floor plan and offers 3 bedrooms, 2 full bathrooms, an open living area, 2 car garage and an entertainment ready backyard.
Located on a cul-de-sac backing up to Alameda creek, this home has a private setting yet allows quick, convenient access to Paseo Padre Parkway and two major Highways.
The front door leads into a formal entry hallway affording privacy to the nearby living area. Immediately to the right is the access door into the 2-car garage.
Stunning brazilian cherry engineered flooring flows throughout the the house and is enhanced by dramatic interior halogen track lighting. The result is an elegant, contemporary atmosphere.
The kitchen features recessed lighting, double-sided stainless steel sink, a garden window, breakfast bar pensinula, full-size fridge, oven, range combo and pantry with additional storage
Just steps away from the kitchen, the spacious dining area is ideal for formal entertaining. The space is enhanced by natural lighting and a serene view of the back garden which is conveniently accessed via the sliding glass door.
A half wall separating the kitchen-dining area from the living room creates a sense of openness & light while maintaining a subtle division between the eating & living areas. The expansive living room is punctuated by step-downs from the foyer & the dining room. Natural light and a view of the lovely back yard are enjoyed via the living room window. The unobstructed floor & wall space allows flexibility for furniture & audio/visual equipment placement.
Strategically placed interior halogen lighting in the living room and hallway combine functionality with atmosphere.
Dimmer-controlled light switches allow users the flexibility of tailoring light intensity to suit their activities and needs.
Two guest bedrooms are located off the hallway on the north side of the home.
Bedroom 1 faces the front of the home and is currently used as a child’s bedroom. Storage is provided by built in drawers and organizers. Overhead lighting & temperature comfort is provided via the ceiling fan.
Bedroom 2 also faces the front garden and features crown moulding and a full size closet with organizers. This room also features a ceiling fan with light package.
The guest bathroom is situated just off the hallway in convenient proximity to the guest bedrooms and features vanity with below-sink storage cabinet, mirrored storage cabinet above the sink, shower over tub and of course a toilet.
The spacious master suite is situated at the very end of the hallway on the back side of the home for maximum privacy.
The master bathroom features a full-size shower stall w/ sliding glass door, storage cabinet above the toilet and a vanity w/ convenient below-sink storage cabinetry.
The Master Bedroom has two built-in closets and a recessed nook ideal for a chest of drawers, armoire or Television & Audio equipment.
The Master bedroom was expanded by a previous owner and features a step-down level that’s currently being used as an in-home office space, but is equally well-suited as a home exercise area, private sitting room or baby’s crib area.
Two wide windows face the back garden providing a lovely view and abundant natural light.
The private back garden is entertainment-ready with its lush lawn area and expansive patio. The Dining Room glass sliding door can remain open to accommodate the flow of many guests in and out of the home.
The lawn area features 3 planting beds - one raised bed along the back fence, and two flower beds one of which is ideal for a vegetable garden.
The wide side yard leads to the garage and is a practical area for a storage shed, BBQ grill or potted fruits and vegetable plants.
For the commuter, there is convenient access to Highways 84 and 880, or one can easily hop onto Bart in nearby Union City.
Outdoor & sports enthusiasts will enjoy the home’s close proximity to well-known Alameda Creek trail. Quick & easy trail access is available via the Beard Staging Ground entrance on Beard, or the Stern Pl trail entrance…both only blocks away! For family recreation the Alameda Creek trail can be taken to Quarry Lakes, or for an even closer destination, Northgate Community park is just a walk away & features a children’s play area.
Parents will be happy to know their children would attend the desirable Warwick Elementary school. With it’s API above median scores when compared to similar schools. And, it’s less than a mile away!
Come see what this beautiful Fremont home and lovely family neighborhood have to offer.
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Good news for you buyers out there: The loan limits for Fannie Mae, Freddie Mac and FHA loan guarantee programs, which were bumped back down to $625,500 in high-cost areas on Jan. 1, were restored to the temporary $729,750 - approved by Congress a year ago in the Economic Stimulus Act of 2008 - courtesy of the Stimulus bill that was recently passed.
Loans up to this amount should start to originate starting beginning of March. This is of course a good step forward for Santa Clara, San Mateoa and San Francisco counties which will all max out at this level.
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Investor Eligibility Requirements
Investors buying the 5th through 10th home will need to meet the standards illustrated above and the following:
1. 720 credit score
2. 25% downpayment for a 1-unit (30% for a 2-4 unit)
3. No mortgage delinquencies in the last 12 months
4. 6 months of reserves for each investment property
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My newest listing at 445 Oak Grove Ave in Menlo Park is a great alternative to a single family home. With 3 bedrooms, 2 bathrooms spread out over 1,286 sf (source: dataquick) it makes for a very flexible floor plan able to accommodate to different life styles and family sizes.
It has been extensively remodeled since it was built in 1975 and features a modern kitchen with an island style breakfast bar, recessed halogen lighting, remodeled bathrooms, inside laundry and wood flooring in the living areas. The living space is further enhanced by the deck and small yard.
Enjoy the gated parking, community pool and proximity to downtown, which together with Kepler’s and Cafe Borrone’s is just a block or so away.
Other Menlo Park institutions you would enjoy while living here: Beltramos, Applewood pizza, Dreager’s, Gambardella’s, Kaygetsu, Left Bank, etc.
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For those of you that are not familiar with some of the newer condo developments in Cupertino, Travigne Villas is a mixed-use development at the corner of Stevens Creek Blvd and Blaney Ave that replaced the strip-mall and creamery that was there for many years. The commercial building has its frontage on Stevens Creek while the condo building sits behind it.
The condo listing in question is on the 3rd floor of this 3 story building with views of the Santa Cruz mountains. It features 2 bedrooms and 2 full bathrooms on one level with only one attached wall.
L.P. Collins elementary school is just steps down Blaney and Lawson Middle school is a block away. The high school is Cupertino High and with the recent changes in the U.C. eligibility standards it will most likely become more attractive.
The property website - with photo gallery and video - can be found at: http://www.dianalangley.com/TravigneVillas
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There are not that many places to have spectacular views in San Carlos while staying east of the Alameda, south of San Carlos Ave and within walking distance to downtown. Either you need to go live on Elizabeth St or Rockridge Rd.
227 Rockridge Rd is nice and unassuming from the street, but once inside you are blown away by the wide views of the bay and on the deck you find out there is plenty of usable land with a myriad of uses.
I’m sure many residents of San Carlos have driven by this cul-de-sac without realizing what an amazing setting this can be. You don’t need to drive up Melendy, Club or Brittan to have unobstructed view. You can find it right there near downtown San Carlos
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510 Gilbert was recently reduced to $1,449,000 from $1,649,000 which constitutes a dramatic price reduction for this 4 bedroom, 3 bathroom new construction home.
If one looks at similar properties on the peninsula, from Burlingame down to Los Altos/Mountain View, one can’t help but conclude what an amazing deal this is. For example, the new construction homes on Oakview in San Carlos are currently listed around $1.6m. This is for homes of similar size without the convenience of being very close to downtown Palo Alto and not quite as commute friendly.
If you’re looking in Menlo Park or more specifically the Willows, let this home be the measuring stick.
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Our colleague Desiree Docktor at Alain Pinel Realtors in Palo Alto is helping organize a tour of 12 Eichler homes in Palo Alto that benifits Peninsula Habitat for Humanity.
The details on the home tour are below:
- Date: September 6, 2008
- Time: 10:00 AM - 4:00 PM
- Starts: Eichler Swim & Tennis3539 Louis Rd, Palo Alto, CA 94303
- Donation: $40.00
- Benefits: Peninsula Habitat For Humanity “A Hand Up - Not A Handout”
For more information email info@eichlerhometourspaloalto.com or call 650.568.7337
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Real Estate in Palo Alto and the San Francisco Bay Area