Ca Foreclosure Law (Original Mortgage Automatically Nonrecourse)
In early 1996, our mortgage holder foreclosed on our Condominium that
we purchased in 1989, which had dropped about 50% in value. We
couldn't afford to take the financial hit (long story there).
We were always under the understanding that original mortgages (we
never refinanced) were automatically nonrecourse in California, which
therefore makes our so-called "cancellation of debt income" zero,
because we were never personally liable for the debt.
Then, I just got a 1099-A form from the Federal National Mortgage
Association (i.e., Fannie Mae), which states that the fair market
value of the property is $0, and that we are personally liable for the
repayment of the debt! Yuck, guaranteed we'll get a little statement
from the IRS in 6 months or so after turning in our return,
announcing that we owe taxes on $122K in cancellation of indebtedness
income, for a nasty little tax bite of about $40,000.
I'm thinking that Fannie Mae just doesn't take the time to investigate
each and every situation, so they just take the most conservative
position on their 1099's, which in this case would be to state exactly
what they did on our 1099.
I'm going to call Fannie Mae about the 1099, but want to make sure
that I have all of my legal duck's in order before I call.
SO HERE'RE MY QUESTIONS:
1. Is it indeed true that all original purchase money mortgages in
California are nonrecourse?
2. Are there ANY exceptions to that rule, assuming that 1. is true?
3. Is there any advice you can give me on dealing with Fannie Mae,
any helpful pointers, in clearing up this apparent mistake?
If any of you helpful attorneys out there could help me, I would be
most appreciative!
It is true that purchase mortgage money mortgages do not allow a deficiency
judgment, so in this sense they are non-recourse. But the foreclosure is still
relief from debt, and the difference between what the house sold for at the
foreclosure sale, and the amount of the mortgage is income to you for tax
purposes. They did not make a mistake in this regard.
It should be noted that (in AZ at least) the anti-deficiency statute only
applies to residential mortgages. California may be different for all I know.