Anyone actually get a DIL from Wells these days?

[oregonheaven]

To prove that the crisis is not just in Florida, California, Arizona, and Nevada, I am posting my Oregon story. Situation as follows:

I am an ultra-responsible taxpayer/citizen with high 700's credit who has decided to walk away from his mortgage. Bought house in late 2007 (right when the peak hit here in Oregon) for $390k. Over the last year, both houses on each side of me have been in foreclosure (builders who went BK). One sold last month (bigger than mine, and nicer) for $330k. The other one goes to auction in early 2009 and will likely fetch $300k. Two others on the street have sold in foreclosure (similar size, lot, finishes) for $300k in the last three months. I owe $385k on a house that is now worth about $320k at best, and declining by the day. Several empty new homes all around me, so situation will get worse. Put $0 into the mortgage with Wells. No other mortgage on the property. All closing costs were paid by seller. Did not put a nickel into the house of my own money, not like I had any to begin with. Had good intentions with the home, but took a 50% paycut when I had to change jobs six months after buying it when the economy went south, meaning it now eats the majority of my paycheck leaving my family hardly anything to eat!

Have hired an attorney and CPA. I highly recommend this for anyone going through this, or thinking about it. The legal and tax consequences of this decision are very significant, and it is worth the one or two thousand dollars you will spend to retain counsel and expert accounting advice. I have no interest in modification with Wells because I can't afford the house anymore, and I can't sell it for years at this point. I just would like a DIL so my credit is not impacted as much. Anyone successful with Wells in this regard? I just missed my first payment. They are supposedly getting back to me in a few weeks to talk. I bet they call sooner when they get the letter from my attorney, or maybe not? Anyone comment here? Also, I am NOT an attorney or tax person by any means, but here are some things I have learned for others to consider that are going through this:

1) Get a competent attorney and CPA! Especially get a CPA who is familiar with the new laws surrounding the Mortgage Forgiveness Debt Relief Act of 2007. You may even need a tax attorney depending on your situation. Expensive, yes, but absolutely worth it. About the same price per hour as a therapist, but can actually help you do something about your problems!

2) Ask your attorney about the deficiency laws in your state. One thing I have discovered is that deficiency generally has two meanings, a bank meaning and a tax meaning. From a bank perspective, they want to collect a deficiency if they can do so under the laws of your state after the completion of foreclosure. Make sure you understand those laws and have an attorney tell them to you. Note, the Internet is not an attorney, and neither am I! Second, don't confuse deficiency for bank judgment purposes with tax (IRS) purposes. The IRS has been unbelievably silent on the difference between recourse and non-recourse loans. According to a couple of IRS field advisory opinions (not binding) in the early and mid 90's in both Alaska and California, an anti-deficiency statute does not create a de facto non-recourse loan for tax purposes.

3) Understand the tax laws! If a loan is non-recourse, the transaction (foreclosure) of your home is treated as a sale under usual capital gains rules that we are all accustomed to. But, most lawyers will tell you virtually no mortgage is non-recourse from a tax perspective no matter where you live or what the anti-deficiency laws say. That is because under most mortgages, a bank has an election to either foreclose on the mortgage or deed of trust, or sue the debtor under the rights of the promissory note, and forgo the secured property. Now, in practicality, a bank will almost always take the property and foreclose versus suing under the note (which I'm told they can do in most states even with an anti-deficiency statute). However, since the bank has this "election", the IRS can see the loan as recourse, even if the bank doesn't pursue the secured property. As I discovered, recourse loan accounting is not nearly as friendly because that is where you get mailed a nice 1099C from the bank for the amount of debt that you have had "forgiven" by them, which you generally must report on your 1040 as income. However, many people can now deduct that COD (cancellation of debt) income from the 1099C on Form 982 under the provisions of the Mortgage Forgiveness Debt Relief Act of 2007 if you meet several criteria, such as it's your primary residence, the loan was used entirely to build or acquire your home, etc. Like I said, I am in NO way the expert here, but I wanted to make you aware of all the different issues you need to ask your tax professional before going down this path. Thank goodness for the new legislation. Because of so many people underwater right now, there would have been an even bigger crisis without it in terms of more bankruptcies, etc.

3) If you go down this path, my personal recommendation is to not wait out the bank in your home for 6+ months. I know it's tempting, but use the time you have good credit to get a good rental with a solid landlord. Be very careful with landlords. Many are insolvent right now and borrowing from Peter to pay Paul. Check the history of the property you are renting with the local county appraiser to see when it was purchased. Chances are, if it was purchased prior to 2000, there is still equity in the property and unless the owner re-fi'd the heck out of it (like many current borrowers), you are probably safer than not. And finally, I personally would stay away from renting new homes. Builders are on the ropes, and when they go BK, you end up getting an unpleasant knock on the door as many of my renting neighbors have discovered.

So, back to the original question, anyone ever get a DIL with Wells? Thanks all! Peace for the new year.

[AZChick]

Thanks for the great info!

[J2911]

Great info, thanks. My 1st is with WFB too and would be curious if anyone has actually gotten one as well. January will be my 1st missed payment. I've been debating whether to stay the 6-months rent free or secure a rental before our credit is down the tubes. I checked a lot of the rental management companies' rental applications to see what is asked, etc. The only thing they want to know on the app, is if you've had a bankruptcy, or been evicted. I too have thought of landlord's possibly being insolvent like us...Some neighbors (renters) two doors down recently were forced to move because the house foreclosed, but they too lived in it rent free..the rental co/bank told them they could not take their payments as the house was in foreclosure.
Re: Tax implications. If not for the Debt Relief Act of 2007, I would be paying capital gains tax on over $150K, ouch. I would have to use the money I'm saving during this rent free period to pay the taxes. I work for the taxing agency in CA and have seen many taxpayers forget to include the gain on their tax returns only to be audited later and have to pay the tax, penalties, interest...not pretty.
Thanks again

[AZChick]

J2911, do you understand the debt relief act? I have a question. I'm in AZ, if my owe way more than it's worth, I'm over 100K under I assume I'll get the 1099C/A if I let the house go. If I go ahead and move out, how do they assume it was my principal residence if I leave right before the foreclosure, I've owned the house 3 years and rented it out for 11 months during that, I'm concerned it may not be viewed as my principal residence...I've been living at the house for the past 10 months since the renters left..I want to make sure I can qualify for debt relief if I decide to let the house go...I'm looking into all options at this point..thanks!

[J2911]

I understand it as well as the average person. I work as a budget analyst, so I no longer am required to study tax laws. Of course this one hits home, so I will be doing research. I do know that each state has their own tas laws. CA decided to piggyback on the IRS ruling for this one (we don't always follow IRS rulings). I recommend checking out the IRS web site for information, the Q&A section is helpful. Also download form 4681. That form defines your principle residence as: the home where your ordinarily live most of the time. You can have only one principal residence at any one time. Home Foreclosure and Debt Cancellation

[AZChick]

Thanks for your reponse....I'm going to call the irs Monday and hopefully get some specific answers...

[oregonheaven]

Just keep in mind that if you get a 1099C, which you almost assuredly will, you need to consider both how to account for the COD income from the 1099C, and the capital gains from the actual disposition of the property via foreclosure. Presumably if the loan was used to buy/acquire your residence and you are underwater and foreclosed on, you can exclude the 1099C income on Form 982 on your 1040, and since the COD income resulted from the transfer of the property back to the bank, you don't have to reduce your basis in the property (generally your purchase price) for capital gains calculations. Thus, the selling price on the house for cap gains purposes is your loan balance, and the basis is what you paid for the house (which means you have no gain at all if you are underwater). Even if you are above water after this calc, if you lived there for 2 years, you can generally exclude up to $250k+ from cap gains anyway. Thus, many people are going to end up getting out of their houses completely tax free. Let's hope people in anti-deficiency states who put little down don't realize all that, because then they will all bail, and this thing only gets worse from here.

This is why I am leaving. I don't want to wait for the government to catch on and then change the laws. Then I'm really screwed and have to declare BK (which only helps you if you can qualify under Chapter 7 which I can't because of the means test thanks to the republicans in 2005). Argh! The really bad thing is this thing has spooked people like my wife and I so bad that we likely won't buy a house for ten years or more. When the homeownership rate gets to 67% in this country (2007), and the the foreclosure crisis starts (2008), where do banks think all these new customers are coming from for their foreclosures? Everyone who could (and couldn't) afford a house over the last 5 years got one. Now, the only people buying know their leverage, and they are getting fire sale prices. Good for them, but don't expect the rest of us to stick around to subsidize them while we all suffer to make a payment on something we are woefully upside down on and our families are hungry. Especially while Wall Street banks walk off with billions and insurance companies that are "too big to fail" spend our tax dollars to pay executives inflated bonuses and hold off-site meetings at five star resorts. In case you were wondering, yes, I am a bit upset about this whole experience, and pray that this country learns something from all of this (I know I sure have). Peace to you all. Good luck....

[J2911]

Thanks again, you explain it layman's terms, which is oh so helpful!
Tax Law is way to complicated!

[cactus77727]

Well said oregonheaven!!! I am as outraged as you are. The whole situation is incredible. I will take advantage of any and all legal means necessary to extract myself, and I recommend others do likewise.

I too am afraid they will change the laws. As soon as they get wind that the taxpayers are 'taking advantage of the system' they will act quickly. Notice when a giant corporation does it, it's acceptable, and for the good of the country. But when a taxpayer does it, it's "immoral, you are a deadbeat, and how dare citizens game the system" (I'm quoting what I hear in the mainstream media) Hopefully we will be way down the road on our "mortage walk".

[tdskkenn]

Oh no! I am worried about the "principal residence" issue now. I had read (and I thought it was on the IRS website) that principal residence is defined by using section 1034 of the code--if you lived in the residence for at least 2 of the past five years, it will be considered your principal residence for purposes of the debt relief act.

I am also someone with near-perfect credit who is walking away from my wells fargo mortgage (in arizona). Not sure whether they will do a deed-in-lieu but I would be happy about it so that I can get the sale of the home wrapped up before 2010.

I will do research again on principal residence and will post what i find. I also plan on calling my az accountant tomorrow.

Thanks for all the great info in this thread.

[AZChick]

yes, thank you for explaining it in a way that I could understand....let me know what is found out about the principal residence thing. If we are not going to get a gain from the sale/foreclosure because we are swimming underwater, does that mean that being there 2 years or not really doesn't matter?

[oregonheaven]

If it's your principle residence (defined by the IRS for purposes of the Mortgage Forgiveness Debt Relief Act as the place you live most of the time) then a loan securing that residence that was used to either buy, or build your principle residence qualifies for the act and the COD provisions. But let's be clear. First, cancellation of debt income and capital gains are two totally different things. I see a lot of people getting confused here. If you get a 1099C (which most walkers will get), you will get a 1099C indicating COD income for the difference between the loan balance and the fair market value at the time of foreclosure sale. This is the amount of the loan that the bank is "forgiving" for you, and you must report on your 1040. However, as stated, you can use Form 982 to exclude that COD income if you qualify under the provisions of the MFDRA. Living there for 2 of the last 5 years is irrelevant. That settles the COD accounting. However, it doesn't address capital gains. That is entirely different. The IRS treats a foreclosure (DIL, foreclosure, etc.) as a sale. The "sales" price is generally the balance of your loan since we are all upside down. When calculating a capital gain, you generally take the basis of the asset (funny, do you remember when homes were assets?) which is generally the purchase price you paid, and subtract the loan balance (the "sale" price in foreclosure). If you are upside down then you have no gain. At that point, you are clear on COD, and clear on capital gains in my little example here. In essence, you just walked away tax free. Even if you have a gain in foreclosure, the normal capital gains exclusions would apply, where you would have to meet the use and time tests meaning you used it for at least 2 of the previous 5 years (unless one of the other exceptions apply). So in this example, if you lived there the last 3 years and haven't excluded a capital gain in the last 5 years, then this one would be tax free as well.

Just remember, COD income is what the Mortgage Forgiveness Debt Relief Act of 2007 addresses. And due to the Economic Stabilization Act of 2008 (I believe that's what it's called, aka, the bailout of billionaires bill), the provisions of the MFDRA are extended through 2012 now. Thus, if you get hit with a 1099C by end of 2012 you are covered under this law. If not, and the law is not extended, you are screwed. Believe me, it is not at all uncommon for our government to have created a law intended to prevent foreclosures, but actually encouraging them because of tax breaks. They really are that clueless. Just trust me on this one. Thus, if the MFDRA applies to you, you continue to slug it out until 2013, the market doesn't improve, and the law is not extended, you will be paying taxes on COD income unless you can prove that you were insolvent immediatetly before the COD. And if you take a quick spin through the case law that has come before the tax court over the last few years, good luck winning an insolvency claim against the IRS unless you have excellent records, and rock solid tax representation at your hearing.

Finally, please remember that I AM NOT AN ATTORNEY or a CPA or licensed in any way to provide any advice. I have an advanced degree in a quantitative field, have stared down audits in the past (and won), and generally enjoy the tax code for personal enjoyment purposes. These are just my insights to share with you, and you should discuss them in detail with a tax attorney, CPA, attorney, etc. Peace to the people.

[The Professor]

Excellent advice both on hiring a lawyer relative to the potential deficiency judgment issue and tax advice. In point of fact, I've expressed an opinion in the past in my postings that since the issue of recourse/non-recourse is a matter of State law, I completely agree that the focus of a hiring decision should be to find a lawyer skilled in real estate law for the state where the subject property is located.

In actuality, the recourse/non-recourse determination is in my humble opinion, a much easier determination than the potential tax liability (either for forgiveness of debt or capital gains). As I've mentioned in past posts, often times tax law and common sense don't go hand in hand. Additionally the form of the transaction often controls rather than the substance of the transaction. It is one of those things were you've got to follow a safe harbor approach or the potential tax consequences can be punishing. The bad news is that it is quite possible that you can get differing opinions from two skilled tax experts, simply because until a reported decision comes down from either the Tax Court or a U.S. District Court (or a Court of Appeal), the IRS is right. Sort of like throwing out the idea of being innocent until proven guilty.

Take care and good luck in your efforts. Only slight disagreement we would have is I don't think that having a foreclosure on your credit report is going to present all that challenging a problem when it comes to finding a place to live. It becomes sort of a balancing act. Does it make sense to enjoy not paying rent by moving out before you have to?

Daniel

[AZChick]

Question on this:

This is the amount of the loan that the bank is "forgiving" for you, and you must report on your 1040. However, as stated, you can use Form 982 to exclude that COD income if you qualify under the provisions of the MFDRA. Living there for 2 of the last 5 years is irrelevant.

How does qualifying for MFDRA make living in the home for 2 out of 5 years irrelevant? For example if I leave my home now and it doesn't foreclose until July "09, but I left in Jan "09, will it still be considered my primary home for MFDRA purposes if I've lived in the home 2 out of the past 5 years? This timing thing I just don't get??

[Scott]

J2911-
Your quote "CA decided to piggyback on the IRS ruling for this one (we don't always follow IRS rulings)"....

Can you point me to the reference for this? I was wondering about CA taxes but couldn't find a definitive answer online to document that CA is following the IRS on this one.

Thanks,

Scott

[pjd123]

I posted this on another thread, but thought it may be helpful. I don't know that I'm reading it right, but my undertanding is:

I got something from my CPA today - she does my taxes and I discussed this with her a few days ago. She sent me a copy of something right from the IRS website - 'Home Foreclosure and Debt Cancellation'. Its a little confusing to me but my understanding is that under the Debt Forgivenss Act, good through 2009, if you are 'insolvent', meaning if your total debt, mortgage, credit cards, car payment, etc, total more than your assets (house CURRENT VALUE, cars, furniture, tv, computers, pretty much everything you own) you are not responsible for the forgiveness amount. Please correct me if I've misunderstood what I'm reading.

Good luck everyone - I look forward to continuing to read and post information as its discovered.

pjd123

[J2911]

Hi Scott,
From FTB PUB 1001:
Mortgage Relief upon sale or other disposition of principal residence:

For taxable years 2007 through 2012, federal law allows an exclusion of income from discharge of indebtedness from the disposition of your principal residence. Federal limits the amount of qualified principal residence indebtedness to $2,000,000 ($1,000,000 for married filing separate). See federal Publication 544, Sales and Other Disposition of Assets, for more information. California partially conforms to the federal provisions. California allows debt relief for taxable years 2007 and 2008 only. Also, California limits the amount of qualified principal residence indebtedness to $800,000 ($400,000 for married/RDP filing separate) and debt relief to $250,000 ($125,000 for married/RDP filing separate).

Also even if you do not qualify under the CA limits, you may still be able to use the insolvency exclusion.
Insolvency: Tax will not be assessed on the phantom debt-cancellation income if your client can prove insolvency existed when the debt was discharged. Your client must prove that all assets totaled less than all debts.

By the way, you'll notice it's only through TY2008. SB 1242 (pending) extends it through 2009..and I'm sure that bill will be amended to include 2010, or another bill will be introduced to address 2010.

[oregonheaven]

AZ - If you read the IRS discussion on the MFDRA (it's not very detailed), I believe it's Publication 4681, it's very clear that a principal residence under the term "qualified principle residence indebtedness" refers to a place you live "most of the time", and mentions nothing about having to live there 2 years. The 2 years is just the threshold for excluding the capital gain (as if we were lucky enough to have one). This is just my understanding from my conversations and readings. Now in terms of your question, it is very interesting. I can't find a single case on it, nor can I find any tax guidance. I submitted it to a legal friend of mine and will follow up with you. But, the spirit of the principal residence rule is that you are not allowed to exclude COD on investment homes, vacation homes, etc. By limiting to where you spend most of your time, you only get one home to call a principal residence at one point in time. I believe that if you rent after you move out and then get foreclosed on, even if the difference in time is several months, you acquired the principal residence indebtedness to acquire your principal residence at the time. Since you don't own another home currently, it would seem to me that you would qualify. At least that is my very basic belief, not an expert opinion in any way. Until a case is formally heard by the tax court, I think a lot of these exceptions are going to be open to interpretation. If you read the actual law that created MFDRA, you will see that it specifically calls out that principal residence is to be defined as it is in section 121 of the tax code. However, while section 121 lays out the rules for excluding capital gains on home sales, it simply doesn't specifically define a principal residence in straight up language. Wish I could be more helpful. Hope to have more info soon......

[KT in CA]

It would seem to me it would be pretty easy to prove insolvency to the IRS based on credit card statements, car loan billing statements, bank account balances (or lack thereof), and mortgage statements. That is hard proof of what your debts were as of a certain date. And assets are easy too if all you have is the cash in your bank and the so-called assets in your home (tv's, jewelry, etc.). Since we refinanced we are not going to be protected by the Mortgage Debt Relief act so we are hoping to have some relief from insolvency. If not, the IRS and the State of CA better get their payment plans ready...

[pjd123]

Hi KT in CA - we also refied, but being upside down 70-80K, plus 15K in credit card dept, a car payment, and few assets (my tax person said your belongings are only worth what you could sell them for in the paper - so no much) I'm pretty sure we will be involvent and therefore not responsible for that income of the write-off. I hope things work out for you that way too. Good luck.

[oregonheaven]

Insolvency people - not saying you can't claim this, but please please please be very careful. The IRS is well skilled at this game. They even have "the insolvency unit". Case law is also very extensive in this area. Many people have tried and failed in tax court. The most notable reason seems to be a lack of paperwork. You must have records on absolutely everything. I also want to point out two important aspects to discuss with your CPA and attorney if you go this route. Actually, 3. The first is that the calculation of current assets to current liabilities is as of the day before you foreclose. Thus, if you sit in the house or don't make payments for a year until they foreclose, and you accumulate the cash or pay off your debts, you will substantially reduce your asset to liability ratio, and remember, you can only exclude COD income up to the extent you are insolvent. Second, retirement assets count against you as assets. Even though many pensions, 401ks, etc. are protected from seizure, not so for purposes of calculating assets under the insolvency test from what I have been told. Third, and likely very important. Are you going to own the house after your COD? In other words, are you taking COD because of a loan mod or because of foreclosure? If taking because of foreclosure, you are fine with basis in the capital gains calculation. If not, and you still will own the house after the COD (loan mod), you must reduce your basis in the house for capital gains calcs when you sell it in the future. This means that when you sell (hopefully at a gain), your capital gain will be larger than it otherwise would have been. Not a big deal if you are there 2 years, meet the ownership and use tests, and can exclude all of the gain up to your limit. Remember, not an attorney or CPA. Ask one for real! Peace.

[KT in CA]

We are upside down in our house by at least $100k. Have $40k in cc debt that I won't start paying down until we foreclose. Have a car payment. Have a payment for an RV. Drained both retirement accounts trying to stay in this dang house. The extra cash will "accumulate" elsewhere and not in our bank account so there will be no proof we still have it. Luckily for us I keep pretty good records and have our cc statements and billing statements for many years back. I should be able to provide whatever they ask for. I'll even run a credit report for them to show just how much debt we do have. I guess we just need to get a good tax attorney.

[ultimate4799]

Hi oregonheaven, Thanks for sharing this helpful info. I appreciate it.. I too have my first loan at WFB(2nd is SLS) and thought about walking away. I'm pretty new on this and still in midst of doing some research. I bought my home in 2005 for $700k(80/20) and refi on 2007 $760k(80/15). Based on what you know, do you think I can qualify for the mortgage forgiveness/ tax relief as well if I decide to walk out and have this home foreclosed? House is underwater by $230k as of today. I'm getting scared since I've read that since I did refi, it is now a recourse loan and I worry banks will haunt me to payback deficiency or sue me? Highly appreciate any inputs.. I'm from CA btw.

[AZChick]

thanks for info oregonheaven, let me know if you find out anything else about principal residence as applied to MDRA.

[pjd123]

Oregonheaven, thanks for the great info. When we walk away we will have way more debt than assets. Like KT in CA, we won't be paying down anything until all is said and done. Right now we are making the minmum payment on all other debt and have no 401k's. If anyone has any other info on this subject, please post it. Having to pay thousands in taxes after all of this would be a horrible blow.

Blessings and success to all in going through the stress of this.

pjd123