Short Sales

[RLymanC]

From Spidell:

Short sale on principal residence means no COD (12-03-13)
The IRS has opined in a Chief Council letter dated September 19, 2013, that the short sale of a California principal residence converts the mortgage to a nonrecourse loan and is treated as a sale, not COD. Under California law, when agreeing to a short sale, the bank may not go after the borrower for any shortfall on the debt.
The letter states that, under the anti-deficiency provision of Code of Civ. Proc. §580e, the debt would be a nonrecourse obligation, and for federal income tax purposes the homeowner will not have COD income. Instead, the full amount of the nonrecourse indebtedness is treated as the sales price.
Because California conforms to IRC §108, with certain unrelated exceptions, California will conform to the IRS letter. (R&TC §17024.5)

[John of PA]

Just want to mention that the provision exempting from taxes up to 2 million of COD income on personal residence and from personal bankruptcy is gone in less than a month, it expires 12-31-13. If anyone has such a settlement in the works, it may be prudent to close out by year end.

[mactoolsix]

From Spidell:

Short sale on principal residence means no COD (12-03-13)
The IRS has opined in a Chief Council letter dated September 19, 2013, that the short sale of a California principal residence converts the mortgage to a nonrecourse loan and is treated as a sale, not COD. Under California law, when agreeing to a short sale, the bank may not go after the borrower for any shortfall on the debt.
The letter states that, under the anti-deficiency provision of Code of Civ. Proc. §580e, the debt would be a nonrecourse obligation, and for federal income tax purposes the homeowner will not have COD income. Instead, the full amount of the nonrecourse indebtedness is treated as the sales price.
Because California conforms to IRC §108, with certain unrelated exceptions, California will conform to the IRS letter. (R&TC §17024.5)

Do you have link to that CC Letter? I'm curious as it has been held in several court cases that CCP § 580d does not convert an otherwise recourse debt to nonrecourse. Rather, it prevents the foreclosing lender from obtaining a deficiency judgment after a non-judicial foreclosure, thereby canceling the debt remaining, if any. This view upholds the COD income while it appears the CC Letter is taking a different stance? Think of the thousands of CA COD income returns that this could effect. We may be doing lots of amended returns?

Refer to Dave Fogel's article Non-Judicial Foreclosure

http://www.fogelcpa.com/Documents/Fogel-NJForecl-CalTaxLawyer.pdf

Mike

[Gary2]

Do you have link to that CC Letter? I'm curious as it has been held in several court cases that CCP § 580d does not convert an otherwise recourse debt to nonrecourse. Rather, it prevents the foreclosing lender from obtaining a deficiency judgment after a non-judicial foreclosure, thereby canceling the debt remaining, if any. This view upholds the COD income while it appears the CC Letter is taking a different stance? Think of the thousands of CA COD income returns that this could effect. We may be doing lots of amended returns?

Refer to Dave Fogel's article Non-Judicial Foreclosure

http://www.fogelcpa.com/Documents/Fogel-NJForecl-CalTaxLawyer.pdf

I think the letter in question can be found at http://online.wsj.com/public/resourc...onrecourse.pdf. I'm not sure why the Wall Street Journal has it posted, and I suppose there may be other sources.

As Dave Fogel points out, there are holes in this reasoning. I don't believe that letter plugs the holes.