I invested in a property located in Southern California back in March 2008. This property was purchased by a friend, he assumed 100% of the mortgage, and the mortgage was to him only, my name does not appear on the mortgage, I did not sign anything related to a loan on this property. My name is on the title for 5% of the property. Another woman owns 20% of the property, and is not a borrower either. We both provided the cash down in return for a percentage of the property (and the right to stay there whenever we would travel to Southern California).
Now the borrower, who owns 74.5% of the property, has a loan balance that is greater than the current value of the property. He lost his job last fall and can no longer make payments. He would like to sell the house in a short sale. If that doesn't work, the property will be foreclosed.
Since I did not co-sign the loan, am I at risk to have my credit damaged? Is there greater risk if it is a foreclosure versus a short sale?
I realize that I will lose all of my investment. Will it be possible to write off that loss, and if so, what documentation do I need to write off this loss?
Answer
If you are in no way connected to the debt, it should not affect you in any way. In fact, if your interest in the property recorded before the debt, then the foreclosure will not even affect your interest in the property. If it was recorded after the deed of trust, you will be wiped out by a foreclosure. What you can claim and how to claim it as a loss in that case you should ask a tax accountant.
Answer
I agree with Mr. McCormick. If the property title was held as tenants in common, with interest in the property specified by percentage, prior to a deed of trust, then a foreclosure would end up with either the lender or the person purchasing at the foreclosure sale becoming a tenant in common with the other owners who did not sign the deed of trust.
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