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| Do5 |
 Posted: Tue Jul 15, 2008 11:56 am Post subject: Here is a question in ref. to foreclosed property |
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Investing Sr. Associate
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If a home is foreclosed on and is sold for lets say $50k and the amount owed was $100k... Is the person who was foreclosed on going to be accountable for the $50k difference?
I have heard that they would get a 1099 showing the $50k as profit for tax purposes...
anyone know? does it vary by state? |
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| Dave Rathbun |
| Posted: Tue Jul 15, 2008 4:39 pm Post subject: |
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CFO
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Simple answer first:
If it's foreclosed, then the bank did a write-off for the difference. But when you sell the home, unless you lived in it for two years, you'll be paying capital gains taxes.
If you want more detail, read on.  This is the way I understand the rules to go, consult a real tax accountant to confirm.
Suppose a bank has a mortgage on a house. The house would appraise for $200K and the mortgate is for $150K. The owner defaults, and the bank takes possession of the house. They sell it at auction for $100K. During the process, $100K of equity has evaporated. The owner walked away from $50K when they left the house, and the mortgage company wrote down $50K loss when the sold at auction. So that's where the missing funds went.
If you were the person that bought the house for $100K at auction, that's your cost basis for the house. Two scenarios from here...
1. You pay someone to fix up the house and drop $20K into the house in doing so. You then sell the house for $165K. Your cost basis is $120K and your profit is $45K, so you pay capital gains taxes on that amount.
2. You pay someone to fix up the house and drop $20K in doing so. You move in to the house and live there for two years, and add more time and "sweat equity" into fixing the house up even more. After two years you sell the house for $210K. There is a $90K gain on the house, tax free, because it was your primary residence for at least two years. You're allowed up to $250K in gains every two years on property as long as you live there. ($500K if you are married and file jointly with your spouse.)
I have a friend in New Orleans who is making a decent living by moving every two years and doing just this. He buys a house, fixes it up, lives there for two years, sells it (hopefully) and moves on. |
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| Do5 |
| Posted: Wed Jul 16, 2008 7:09 pm Post subject: |
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Investing Sr. Associate
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OK, I understand your post on the capital gains... which I thank you for.
but still not sure about my original question...
A friend had a house loan amount was $85k, valued at $105k.
it was forclosed in April, and sold for $30k...
so the bank just took the $55k loss? I know that their credit is screwed, but didnt know if there would be anything to come back on him in the future? |
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| Dave Rathbun |
| Posted: Thu Jul 17, 2008 3:35 am Post subject: |
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CFO
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| Do5 wrote: | A friend had a house loan amount was $85k, valued at $105k.
it was forclosed in April, and sold for $30k...
so the bank just took the $55k loss? |
Yup, that's the way I understand it. They try to recover what they can from a foreclosure by selling the property. If your friend just walked away then he might be liable in some way, but if he or she went through a bankruptcy proceeding then I don't think they're liable for the missing value.
It's one of the reasons banks are in the business they are. They try to make sure that folks can pay back their loans, and that they have the intention to do so. If the sort of scenario you outlined were common, banks would not stay in business very long. |
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| Do5 |
| Posted: Thu Jul 17, 2008 6:32 am Post subject: |
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Investing Sr. Associate
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No BK... they just walked away... left $20k in equity...
i just shook my head in disbelief,
The realtor they used was a joke.
They had it listed for 4 months at appraised value $105k, I suggested that they at least tried to move it for the payoff... or short sale at worst.
i know that $105 isnt alot of home for some, but here in rural NC this is a 1500 sq ft home.
thanks for the replies Dave! |
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| Dave Rathbun |
| Posted: Thu Jul 17, 2008 8:34 am Post subject: |
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CFO
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| Do5 wrote: | | No BK... they just walked away... left $20k in equity... |
Then, to be honest, I don't know. I expect there is language in the foreclosure legal notice that would explain it.
Sucks to hear about that story, I am sorry for your friend. |
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| Grimreaper |
| Posted: Thu Jul 17, 2008 9:07 am Post subject: |
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CFO
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Amazing how my purrdixshuns of how ya'd be able ta buy houses fer .50 centavos on da dallah came troo...ainna?  Technically spekkin, I baleave da bank who lent yer friend da muny can now sue fo da diffrunce ifn they wanted to. The thang is dat mosta da banks won't have the means to sue cuz they will be defunct.  Sooooo, yer friend "might" hasta werry about some attorney a$$ole who wants to step in and git tricky wit da court system by buying out da rights to da werthless paper on behalf o'da bank.  Jist tell yer friend to stay broke and file BK if necessary cuz dat right theeeya happens. It'll be ALOT cheaper and he'll have less worries on his mind.  |
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