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Is your bank threatening to foreclose? Are you left owing more than the house will sell for? Depending on whether or not your loan is recourse or non-recourse, your tax consequences will be very different.

Non-Recourse Loans

Most mortgage loans in Arizona are Non-Recourse loans, meaning that the borrower does not have any personal liability and that the creditor’s only remedy is to take the property as collateral. On a non-recourse loan, there is no Cancellation of Debt income.

Recourse Loans

Even though Arizona has anti-deficiency statutes in place, some loans are still Recourse loans. An example of these would be a mortgage that was refinanced to take cash out or a Home Equity Line of Credit (HELOC). On a recourse loan the creditor has the right to pursue the borrower for the deficiency after a foreclosure or they can write off the balance owed and issue a 1099-C (in the case of a short sale or loan modification) or a 1099-A (in the case of a foreclosure or deed-in-lieu). In this case the borrower would be required to count the forgiven debt as ordinary income (Cancellation of Debt Income) on his or her tax return.
Even if your loan is a recourse loan, if it is your primary residence in question you may find relief through the Mortgage Forgiveness Debt Relief Act. Please check with your accountant to make sure that you qualify.

Change In Capital Gain Or Loss

When you short sell your home the price at which you sell is the actual sales price and thereby reduces the capital gain or increases the loss, depending on what your basis was when you purchased the home. If you foreclose, the debt(s) owed on the property make up the deemed sales price. For a more in-depth discussion of this, please see The Benefits of Selling your House as a Short Sale below.

Consult Professionals

The information that I have given here and elsewhere on this website is general “rule-of-thumb” information. It is not intended to be tax or legal advice but instead is meant to educate you to the point of knowing which topics and questions you should discuss with your Accountant or Real Estate Attorney. As with all tax law, there are nuances and requirements that affect which category you fall into so PLEASE consult with your Accountant and Real Estate Attorney prior to determining whether you wish to walk away from your home, short sell, etc. If you don’t have reliable professionals to consult with, please see the Recommended Professionals section on this page for some people you may wish to hire to advise you.

If you decide that a short sale is your best option to avoid foreclosure, you will need to hire an agent to assist you as the banks require that you have an agent in order to do a short sale. Again, it is imperative that you hire someone knowledgeable and experienced as it can mean the difference between whether or not you sell the home or end up in foreclosure. If you live in Tucson, AZ, I can assist you. I am a Certified Default Resolution Specialist and have been working with short sales in Tucson since 2006. If you live elsewhere in the country, I would be happy to provide a referral to a capable agent with short sale experience.
If you would like to discuss your specific situation, I will provide a no obligation phone consultation if you call me at (520) 481-3695.


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