REAL ESTATE MATTERS For release 11/08/13

BC-glink 11/08 TMS Original

REAL ESTATE MATTERS For release 11/08/13


Should underwater homeowner stiff lender despite ability to pay?

Tribune Content Agency

By Ilyce Glink and Samuel J. Tamkin

Q: I enjoy your column and follow you on Facebook. In a recent article, you mention that the IRS Gift exclusion limit is $13,000 per person per year. Since Jan. 1, 2013, the exclusion is $14,000 per person per year. For details see: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes

A: You're right. Thanks for catching that mistake. We wouldn't want anyone to be confused by what can be given, tax-free, this year. It is $14,000 per person, or $28,000 per couple. Everyone who is part of the gift should be named on the check.

Q: I am to receive about $300,000 in January from my retirement plan. I could pay off my primary home mortgage of about $100,000 plus my second mortgage of about $40,000, but I am thinking about just walking away from my home. Then I could find a home that costs around $100,000 and save myself about $40,000. I know my credit would be hurt, but can my lenders sue me for doing this?

A: Depending on where you live, your lenders could certainly sue you for any money you owe them after you leave them holding the bag. Think about it: If you walk away from your loans, and your lenders were to find out about the money you receive from your retirement plan, you could expect them to come after you for the money you owe them.

You could try to sell your home now, and if the market is such that your home's value is less than what you owe the lenders, you could see if they'd agree to the short sale. If they agree, it seems that the short sale would generate enough money to pay off the first mortgage holder but not enough to pay off the equity loan. At that point, you could negotiate a settlement with the equity lender and either pay them less than what is owed or agree to repay them the balance over time.

The decision to repay your lenders has to be yours. Keep in mind that if you walk away from the home or you agree to a short sale, the deficiency (the difference between what you owe and what your home ultimately sells for) could be taxable to you if you close in 2014. However, if this home is your primary residence, and all of that debt was used to buy the home or to improve the home, and if your lenders release your debt before the end of 2013, the IRS won't require you to pay income tax on the released debt.

We don't know whether Congress will extend the law that does not require homeowners to pay tax on the released debt. You might be better off trying to sell the home and getting as much money from the sale as possible. With some real estate markets improving, you might limit some of the loss from the sale and decide to pay off the debt you owe your lenders, thus preserving your credit. If you let the home go into foreclosure, it's likely it will sell for far less and that the lenders' costs will be far greater. Assuming you think you owe $40,000 to your lender, after foreclosure expenses and a lower selling price, we wouldn't be surprised if the amount you owed would be far greater than that amount.

If you're truly intent on not paying your debts, you'd better find out what the laws of your state provide regarding residential home borrowers and their obligations to repay loans after a foreclosure. That's especially true if this happens after you liquidate your retirement account. Generally, qualified retirement accounts like IRAs and 401(k)s are protected from creditors. Once you liquidate the account, that protection may be lost.
