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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1408
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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If one of the owners of a home takes out a mortgage on that

Customer Question

If one of the owners of a home takes out a mortgage on that property and eventually defaults on the loan is the entire property up for foreclosure or just the percentage of the house that individual owns?
Submitted: 5 years ago.
Category: Tax
Expert:  Anne replied 5 years ago.

Thank you for using justanswer. Unfortunately, if you used your house itself as the collateral, it is the same as taking out a second mortgage and the amount for your home improvement loan secured will be based on the equity of your home. You are putting your house on the line and if you default on your second mortgage, the terms of your home improvement loan secured allow the bank to reclaim the property that you initially pledged: your house.

The fact that the loan was only in your name doesn't really enter into the equation, since there's no way for a bank to repossess 1/3 of a property.

I truly wish I could have given you a different answer, but I hope this at least gives you some clarity on this subject.
Customer: replied 5 years ago.
I forgot to say that the loan was for $60K and the home is worth 170K. If the house is sold all the remaining equity will be lost to us?
Expert:  Anne replied 5 years ago.
Unfortunately, the short answer to your question is yes....unless you can find a buyer for the home before the foreclosure goes through.

A Foreclosure is handled under the tax code in the same way as if you sold the residence, meaning that you have a sales price, less your cost basis in the home, and then either a net gain or loss.

You may not use the $170K figure as your basis in the house. Instead you must use your actual cost basis (the purchase price of the house, plus the cost of any improvements you made during the time you owned the home. If you did the labor yourself instead of contracting it out, then you may not count the cost equivalent of your labor, but you may include the cost of any materials that you purchased over the years)

The bank will be issuing a 2012 Form 1099-AAcquisition or Abandonment of Secured Property

The main boxes that you will be interested in is box 2, which is the balance of the debt still owed, and box 4, Fair Market Value of the home.

However, how your figure the gain or loss on house sold (foreclosure is still a sale) is by subtracting the cost basis (as described above) from the sales price (which is the $ amount in box 2 of the 1099A.

If this results in a loss (which it sounds like it will) then unfortunately, you may not take the loss on the sale/foreclosure on your tax return. Please see below for more in depth information.

Publication 523 (2010), Selling Your Home

Again, I wish I had better news for you.
Expert:  Jax Tax replied 5 years ago.
Let me step in here. First and foremost, when a person gets a loan, they can only put up as collateral what it is that they legally own. So if only 1/3, then only 1/3 is subject to the loan. You state there are three owners. How many were there on the deed when the loan was taken? Also, how the property is held makes a difference in what is legally Owned. Joint Tenancy, Tenants in Common, or other structure? Assuming you own only a 1/3 separate interest and it was this way at the time of the loan, and the others did not sign, then the bank has only the right to 1/3 interest. They can directly foreclose and sell your 1/3 interest to a stranger. Not very likely to find a buyer. They can go to court to foreclose the lien and then force a police sell of 100% but 2/3s of the proceeds go to the other owners. So, without more info, what they can do is unknown. How is it owned when the loan was taken?
Expert:  Jax Tax replied 5 years ago.
Please.let me know if you need additional assistance.