Discussion Archives:Client's House Underwater

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Discussion Forum Index --> Advanced Tax Questions --> Client's House Underwater


Discussion Forum Index --> Tax Questions --> Client's House Underwater

LATaxes (talk|edits) said:

1 June 2010
Hello,

My client owns a home in southern California. He is currently underwater. He owes more than the house is worth. He owes about $800,000 and expects to be able to short sell it for $700,000. He bought the house with a first loan and a HELOC, at $620,000 and $180,000 (interest only). He has no equity in the house.

If the house sells for $700,000 I assume that the first loan will be entirely paid off and that the HELOC will be partially paid off.

What happens then, taxwise and otherwise? Client will presumably have no liability to the first lender cause their loan was entirely satisfied with the sale. The HELOC is a recourse loan. What advice can I give my client about how to engage with the second lender about this transaction?

Taxwise, I assume there will be no 1099-a or 1099-c from first lender. What can we expect from second lender? If 1099-c arrives, can Form 982 be filed to exclude the cancelled debt?

Belle (talk|edits) said:

June 1, 2010
If you search (yellow box to the left) for 'short sale, 1099-C, 1099-A, Foreclosure' etc - you'll be inundated with prior discussions on this topic. User "DaveFogel" has addressed this situation numerous times for us.

DaveFogel (talk|edits) said:

2 June 2010
"The HELOC is a recourse loan."

Are you SURE? I wouldn't be so sure if this was owner-occupied property and the proceeds of the $180,000 HELOC were used to purchase the property. See section 580b of the California Code of Civil Procedure.

If the HELOC is a nonrecourse loan, then it is deemed to be canceled upon the short sale because the property will have been sold and the "second lender" would not have any property to seek payment from. As a result, the "amount realized" from the short sale would be the principal balance of both debts.

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