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Discussion:C.O.D. on Rental Property

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Discussion Forum Index --> Advanced Tax Questions --> C.O.D. on Rental Property


Discussion Forum Index --> Tax Questions --> C.O.D. on Rental Property

Khillis (talk|edits) said:

1 March 2010
My client has a rental that was purchased as a personal residence in 2005. They lived in it for less than a year and then moved out of state. In 2009 they short sold it and have received a 1099C. Does the California purchase law disappear when a personal residence is converted to a rental? The property has never been refinanced.

R2 (talk|edits) said:

1 March 2010
I think you are asking if 580b protection applies if the property is converted to rental purposes.

Believe that 580b applies whether or not the client was living in the property at the time of the disposition.

DaveFogel (talk|edits) said:

1 March 2010
The question of whether converting a personal residence to a rental converts the otherwise nonrecourse loan under California law to a recourse loan is an unsettled issue. I am not aware of any court or government agency ruling on this issue.

In relevant part, Section 580b of the California Code of Civil Procedure states:

"580b. No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser."

This section provides that a loan obtained to purchase a personal residence that is occupied by the buyer is nonrecourse because the lender is prohibited from obtaining a deficiency judgment. However, what happens if the buyer converts the residence into a rental and no longer occupies the residence? Does this convert the nonrecourse loan into a recourse loan? On the one hand, the language of CCCP §580b suggests that what controls is whether the residence was owner-occupied at the time of purchase. On the other hand, it’s not clear because the language could be interpreted to suggest that the residence must be owner-occupied at the time that the lender is seeking a deficiency judgment.

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