Discussion:Nature of Debt

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Discussion Forum Index --> Advanced Tax Questions --> Nature of Debt

Discussion Forum Index --> Tax Questions --> Nature of Debt

VCFOServices (talk|edits) said:

4 May 2010
I have been researching the tax impact of a short sale of a property for a client and have not been able to find an answer relating to character of debt. The following is summary of the issue and I would very much appreciate any guidance you can provide.

Client purchased a townhouse sometime in 2006 with a first and second loan on the property. They lived in the townhouse for approximately one year and then rented it through April 2010. The property was sold in a short sale and the lender forgave approximately $82k of the first loan and $57k of the second loan. Based on my understanding, the loans were never refinanced during the period.

Based on my research, I understand that at the time of purchase the loan would be non-recourse in California since the debt was purchase money encumbrance, the property was owner occupied, and there was less than four units. My question relates to whether at the time of short sale both debts were still considered to be non-recourse or the nature changed to recourse since the taxpayer no longer occupied the property?

R2 (talk|edits) said:

4 May 2010
Since the property was owner-occupied at the time of purchase, I believe that the debt would be treated as nonrecourse at the time of the short-sale.

Sjacobso (talk|edits) said:

4 May 2010
Are you sure it's non-recourse? I'm in California, and had a client with a 1099C marked RECOURSE. Like yours, there was a first and second mortgage on the property, all original acquisition debt, from 80/20 financing. (The second loan was for the down payment.) In their case, however, it was owner occupied.

DaveFogel (talk|edits) said:

4 May 2010
You can't rely on the information on Forms 1099-A and 1099-C without obtaining more facts because the lenders are often providing incorrect information on these forms.

Most real estate attorneys I have spoken to have concluded that if the property was purchased for personal use (i.e., owner-occupied), then the purchase-money debts are nonrecourse due to section 580b of the California Code of Civil Procedure, and converting the property to rental use will not change the nature of those debts from nonrecourse to recourse.

VCFOServices (talk|edits) said:

4 May 2010
Not 100% certain that the loans are in-fact non-recourse. The short sale was supposed to take place around April 15, 2010 and no Form 1009-C issued at this time. I am trying to get a better understanding of the issues and possible tax impact.

Thank you Mr. Fogel for your feedback; I had read some of your articles relating to foreclosure and short sales as well as your other responses to related questions. Thanks to others for their responses as well.

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