But after seeing a tax consultant days ago at H&R Block, I learned there were still plenty of kicks left in the boot of stress and anguish that was walloping my backside.
I was told the government would treat the cancelled debt (the difference between what I sold the home for and the remaining balance of the loan) as income. In my case, that would mean more than $100,000 in taxable income. A whopping number that I would certainly be unable to afford.
For the record, that was not a fun conversation to have. I know nothing about taxes, and what else could I do but trust the words of a professional.
Still, how could this be right? My reporter instincts took over and I immediately began calling anyone who may know better. But all I received were different, generally incorrect, answers all based off varying experiences.
First, I read about The Mortgage Forgiveness Debt Relief Act and Debt Cancellation on the IRS Web site. This appeared to save me on the federal end. But then I read more, about how California does its own thing and still sees the forgiven debt as income.
According to an article in the San Francisco Chronicle, California legislators recently passed a bill that would fix the situation and mirror federal law that excludes “forgiven debt” on a principal residence from being considered taxable income. But apparently Governor Arnold Schwarzenegger won’t sign the bill based on an unrelated provision regarding tax fraud. Ugh.
At this point, I’ve been completely crossed up and am just more confused.
The best information I received came directly from a source at The California Franchise Tax Board who sent some quality information and gave me a hint towards a direction to seek.
The contact told me that I could fall into the category of “non-recourse,” meaning that the lender would not be after me personally to collect any debt, just the property. The other category of course would be “recourse” which opens up another can of worms.
Essentially, “non-recourse” occurred when it was a first-time home loan, it was my primary residence and I had not refinanced or taken out a second mortgage. Bingo! Since I had not refinanced, the debt was secured by the residence. The “Non-recourse” class fit my situation exactly; it was good news.
But then the headache got even worse.
I made a phone call to Wachovia to learn more about my tax situation. When I got a hold of the right person, I was told that my house was not recorded as a short sale, but instead the record indicated that it was recorded as a foreclosure.
Um, excuse me?
This is the first time I heard the word foreclosure, after going through such a long, tedious process to avoid that situation. After 10 minutes on hold and different conversations, I was told it was actually a short sale, but in order to close the loan in their system it has to be marked a foreclosure. So good news there – I guess. Though I’m sure another nightmare looms depending on how that information was delivered to the credit bureau. In all though, it ended up being just another freak-out worthy moment in the nightmare.
With that out of the way, I tried to get the conversation back on track. I needed to know whether or not I fell under the “non-recourse” or “recourse” category. The woman on the line put me on hold for another 10 minutes, speaking with different case managers to find out.
After speaking to a variety of her own sources who apparently don’t have a clue, she got back on the line to let me know that judging by her information, it is considered recourse because Wachovia had the right to collect the debt. When I asked her how that could be, considering I fell in the category of a first time homeowner with no refinancing or second mortgage, she didn’t know. Surprise.
She did, however, tell me that old loans from World Savings (the mortgage company that originally did my loan, later bought up by Wachovia) were “usually” refinanced loans.
Now I’m a nice guy, and even a nicer guy on the phone, but “usually” didn’t apply to me here. Still though, I bit my lip and tried to ask questions that were exclusive to my situation.
But consistent with this entire process, I’d need to speak with another person who would be in the next morning. This was the person who was my original case manager.
At this point, I continue to have no clue as to whether or not I owe in excess of $12,000 in income taxes or if that balance is at zero dollars.
Eventually it’s going to go one way or another. I can’t possibly be the only one in this situation, so hopefully when we can come to a conclusion, I can write about the answers in this column.
But for now, I’m still grasping at answers. I’ll update when I get them – if I ever get them.
Insight? Comments? E-mail me at firstname.lastname@example.org