Phoenix Short Sale / Foreclosure Anti Deficiency Laws continued.

We ended our last post feeling a bit unsure of the consequences if a Phoenix home owner where to Foreclose or Short Sale. So lets pick up with that shall we?

Although we did mention that if the loan fell under the category of a Non Purchase Money Mortgage and did not qualify under the Arizona Anti Deficiency Law Statutes, the lender could come after the individual borrower for up to 20 years to recover the deficiency. We did not touch on the subject of potential tax liability. Put simply, in the past if there was a deficiency that was not collected by the lender and it was a forgiven debt to the homeowner, the homeowner would receive a 1099-C from the lender letting the IRS know that this debt was forgiven leaving the homeowner liable for the taxes because it is considered pretty much a gift from the bank.

There have been several changes to this situation one of which is called the The Mortgage Forgiveness Debt Relief Act of 2007 which takes care of some of these issues. The Act only applies to transactions after January 1, 2007, and before January 1, 2010, and permanently removes the debt forgiveness or (gift from the bank) from income if (a) the real property was the principal residence of the taxpayer; (b) the debt was for the purchase, construction or substantial improvement of the foreclosed or short sale property; and (c) the foreclosed or short sale property was the taxpayer’s primary residence for two of the past five years.

Of course this is the short explanation and as always, I would recommend talking with a tax attorney to be sure this Debt Relief Act applies to you.

That's all for now, more to follow.

Thanks for reading,

Ken Cuellar