Transcript Short Sale – A Short Presentation On The Law

Short Sale and LLC Asset Protection
By
David P. Bonaccorsi, Esq.
Bernard, Balgley & Bonaccorsi
3900 NewPark Mall Road, Third Floor
EDUCATIONAL BACKGROUND
Santa Clara University, B.S. ‘83, J.D., ‘86
I1 Duomo, Firenze (Florence, Italy)
LAW FIRM OF BERNARD, BALGLEY & BONACCORSI
David P. Bonaccorsi, Esq.
Bernard, Balgley & Bonaccorsi
3900 NewPark Mall Road, Third Floor
Newark, California 94560
Phone: 510.719.1888
Website: www.3blawfirm.com
Bernard, Balgley & Bonaccorsi is a quality oriented law firm in the Fremont-Newark area
of the San Francisco Bay Area, and serves the legal needs of its clients throughout
Northern California. Our clients range from individuals to large national corporations that
trade on the New York Stock Exchange. Our firm provides legal services in the areas of
Litigation, Land Use and Real Estate, Insurance Defense, Business Law, Estate Planning
and Probate, Personal Injury and Family Law.
SHORT SALES
1. Short Sale: Is the short sale the only or best
alternative to foreclosure?
•
Other Options to the Short Sale (Loan Workout; Deed In
Lieu of Foreclosure; Short Payoff) – Beware of The
Deficiency Trap and The Tax Trap
•
Short Sale Results In A Cancellation of Debt (“COD”)
•
If considering a short sale, what type of debt is the lender
being asked to discharge? Non-Recourse (i.e. Purchase
Money Loan) or Recourse (Refinanced First, Equity Line of
Credit, a Second)? Recourse to refinance in part the first
but in part to pull out equity to pay off credit cards, buy a
car or other benefits unrelated to refinancing the purchase
money loan? Are their Junior Liens?
2. The Deficiency Trap for the Borrower with the
Lender for a COD
–
California’s Anti-Deficiency Statutes: No deficiency judgment
if lender forecloses on a purchase money loan (e.g., Code of
Civ.Proc., §580d.)
–
California’s Anti-Deficiency Statutes do not apply to short sales
Avoiding the Deficiency Trap: Lender’s Approval Letter
–
Satisfaction and Release of Liability. If all of the terms and
conditions of this Request are met, upon sale and settlement
of the property, we will prepare and send to the settlement
agent for recording, a lien release in full satisfaction of the
mortgage, foregoing all rights to pursue a deficiency judgment.
(But are their junior liens?)
–
3. The Tax Trap for the Debtor With the IRS or
the FTB for a COD
a.
Problem: $1 Million Loan Reduced by Lender to $800,000 on a
COD. The $200,000 forgiveness of debt was treated as ordinary
income. An unhappy surprise to a displaced homeowner who
has sold the home in a short sale on terms agreeable to the
lender but still owes taxes on the amount forgiven.
i)
Ordinary Income: The QPRI Exception Under Federal and
State Law
FEDERAL: Mortgage Debt Relief Act of 2007 (Internal
Revenue Code, §108(a)(1)(E): Qualified Principal
Residence Indebtedness (“QPRI”) is a loan secured by
the residence used to acquire, construct or substantially
improve the residence. The income relief provided is
capped at $1,000,000 in the case of a married person filing
a separate return and $2,000,000 for all others. (COD
between 1/2007 and 1/2013).
ii) STATE: SB 401
Mortgage Debt Relief Forgiveness (Rev. & Tax. Code,
§17144.5): Maximum amount of QPRI: $800,000 for
married or registered domestic partners filing jointly,
head of household, single, widow/widower, and $400,000
for married or registered domestic partners filing
separately. Maximum amount of debt relief forgiven:
$250,000/$125,000. (COD between 1/2009 and 1/2013.)
* EXAMPLE: Debtor (“D”) bought a home for $660,000, subject to a
$500,000 non-recourse debt owed to L. The value of the home has
declined to about $420,000. L agrees to reduce the outstanding
principal obligation to $420,000. D then sells the house to B for
$423,000. O keeps $3,000; $420,000 is paid to L.
*If the QPRI exception under both Federal and State Law is
applicable (assuming the home is D's principal residence) the
$500,000 debt is acquisition debt and is less than $2 million
(Federal) and $800,000 (State). As a result, D can avoid COD
income.
•
•
Ordering (QPRI does not apply to use of
proceeds for purposes unrelated to refinancing
the purchase money loan; i.e. to pay off credit
cards, purchase a car, or pay for tuition, etc.)
Resources. IRS Publication Form 4681; CAR:
Taxation of Foreclosures and Short Sales.
Capital Gains ($500,000/$250,000 Capital Gains Exclusion for
Principal Residences) QPRI and Capital Gains Exclusion
apply if borrower occupied the home as his principal
residence 2 out of the last 5 years. (Int. Rev. Code, §§108,
121.) Capital gains in excess of the capital gains exclusion
may arise for a homeowner who lived in his home for many
years where the depreciated value prompting the short sale
still exceeds the adjusted basis.
Exemptions [Insolvency and Bankruptcy – 26 USC §108, subds.
(a)-(c).]
4. SB 1178 (sponsored by State Senator Ellen Corbett)
Anti-Deficiency Protection for Refinanced Property?
Vetoed by Governor Schwarzenegger on 9/30/2010
ASSET PROTECTION-THE LIMITED LIABILITY
COMPANY (“LLC”)
1.
An LLC allows one or more owners to conduct
business without personal liability.
2.
For income taxes, an LLC is like a partnership for
pass-through tax treatment (i.e., avoid double
taxation). Double taxation occurs where a corporation
(other than an S corporation) pays tax on its income
and the shareholders pay tax on dividends received
from the corporation.
3.
For liability protection, an LLC is treated like a
corporation.
4 . Compare an LLC to other business organizations:
–
Advantages over Limited Partnership. Pass-through tax
treatment like an LLC. But a general partner is personally
liable. Limited partners have limited liability but no control over
business to protect limited liability.
–
Advantages over an S Corporation. Pass-through tax
treatment like an LLC but differs from an LLC in its inability to
allocate profits and losses (IRC §1366.) Corporate debt does
not increase the shareholders’ basis S-Corporations though
can only have one class of stock. (IRC §1361(b)(1)(D).) An S
corporation cannot have among other things more than 100
shareholders, a corporate, partnership, or a nonresident alien
shareholder. The S Corporation cannot be a foreign
corporation or a domestic internation corporation.
–
Advantages over a Sole Proprietorship. A sole proprietor is
personally liable for all of the obligations of the business.
5. Formation and Operation of an LLC
–
–
–
–
Selecting a Name from California Secretary of State
(“LLC” or “Limited Liability Company” in its name.)
Articles of Organization (LLC-1) – Must be filed w/ SOS
[Corp. Code §17050(a).]
Statement of Information (LLC-12) must be filed w/in 90
days of filing the LLC-1. [Corp. Code §17060.]
Operating Agreement (Great Flexibility for Management
Structure)
- Can be formed for any lawful business activity
–
Exception: Financial Services and Professional
Services
- One or more members/Managing Member(s).
- Maintain an office in California.
- Minimum Franchise Tax of $800
6. Exceptions to Personal Liability for
Members of an LLC
-If set forth in the Articles of Organization or
Operating Agreement
Questions??
More questions?
David P. Bonaccorsi, Esq.
Bernard, Balgley & Bonaccorsi
3900 NewPark Mall Road, Third Floor
Newark, California 94560
Phone: (510) 791-1888
E-mail: [email protected]
Website: www.3blawfirm.com