Published on June 27, 2014
Clientwhys.com 39 Foreclosure & Debt Relief Issues remaining amount of the indebtedness outstanding at the time of sale . These rules only apply where: • The short sale is in accordance with the written consent of the holder of the deed of trust or mortgage ( borrower ). • Title has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where all or part of the real property is located. • The proceeds of the sale have been tendered to the mortgagee, beneficiary, or the agent of the mortgagee or beneficiary ( lender ), in accordance with the parties' agreement. • A holder of a note ( lender ) shall not require the trustor, mortgagor, or maker of the note ( borrower ) to pay any additional compensation , aside from the proceeds of the sale, in exchange for the written consent to the sale. • No fraud or waste has been committed with respect to the real property secured by the debt. If fraud or waste was committed, then the holder of the deed of trust or mortgage (lender) may seek damages and use existing rights and remedies against the trustor or mortgagor (borrower) or any third party for fraud or waste. The Big Question was how does this impact the COD calculation for federal purposes? Does amended Section 580e make loans non-recourse for federal purposes when there is a short sale? Original IRS Guidance – Back in August of 2013, Senator Barbara Boxer attempted to get some clarification on this issue by writing Acting Commissioner Daniel Werfel. The Acting Commissioner passed the letter on to the IRS Office of Chief Counsel who responded to Senator Boxer. In the letter – Number 2013-0036 , the IRS stated that they believed that a homeowner’s obligation under the anti-deficiency provision of section 580e of the CCP would be a nonrecourse obligation to the extent that, for federal income tax purposes, the homeowner will not have cancellation of indebtedness income. Instead, the homeowner must include the full amount of the nonrecourse indebtedness in the amount realized. The IRS also specifically noted that they did not express an opinion on whether an indebtedness described in section 580e of the CCP is treated as nonrecourse debt for other federal income tax purposes. Here we are several months later, and the IRS Office of Chief Council has decided to change their position. In a letter to Senator Barbara Boxer dated April 29, 2014 the IRS now says that the short sale legislation passed by the California legislature in 2011 does not change the character of a recourse loan to non-recourse. Senator Boxer has responded by requesting additional clarification and relief for taxpayers that relied upon the IRS’s first stated position.