Consequences of short sales and foreclosure

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TUCSON, AZ - You could keep paying or walk away on your upside down mortgage but do you know the consequences?

Justin Strauss never thought in three years his condo in Starr Pass would depreciate like this.

As a real estate broker and owner of Titan Commercial, he knows how the other units are selling. He estimates he's $80,000 upside down or negative equity.

"Property is worth 60 percent of what we owe on it," Strauss said.

He has decided to hold on to it but he can't say the same for his neighbor.

"The lady next door bought several of them and has decided to just turn the keys in," Strauss said.

So what happens if you turn in the keys?

Timothy Remick, real estate attorney with Little, Remick & Capp, says in most cases in Arizona, lenders can't come after you for the difference but they possibly could if you took out additional money. An example would be a home equity line of credit. The money could be forgiven if it was used to buy, build or substantially improve the property.

In a short sale the lender could also take action. This is where the bank agrees to let you sell for less than what you owe. Remick says if the lender doesn't agree to forgive the debt you may owe them thousands of dollars down the road.

"If you don't get it in writing from the lender that they're going to do that, then you're still on the hook for that full amount," Remick said.

You might also be on the hook when it comes to taxes.

According to the IRS website and the Mortgage Forgiveness Debt Relief Act of 2007, you won't be taxed on the "cancellation of debt income" on a foreclosure or short sale, if it was your primary residence.

However, most home loans in Arizona are considered "non-recourse" debt anyway so you won't be taxed even on an investment property. That could change if you refinanced or took out money.

You can also get out of paying taxes if you filed bankruptcy or if you claim insolvency, which means your assets were less than your debt at the time.

Remick says ask a professional before making a decision you could regret.

Click here to learn more about the Mortgage Forgiveness Debt Relief Act of 2007, http://www.irs.gov/individuals/article/0,,id=179414,00.html