Fred Witt PLC, Phoenix Federal Tax Attorney

Tax Alert — September 2014

Recent Case Clarifies Anti-Deficiency Protections for Arizona Homeowners

If an Arizona homeowner qualifies for protection under the Arizona anti-deficiency statutes, qualified purchase money mortgages are made effectively nonrecourse.

Fred Witt


Fred Witt


If you borrow $1,000 to buy your single-family residence and the value later declines to $800, an Arizona homeowner is not liable to the lender/creditor for the $200 deficiency. Thus, if an Arizona single-family residence on two and one-half acres or less was purchased in 2012 for $1,000, with a tax basis equal to $1,000, a foreclosure in 2014 for the $1,000 debt (assuming no payments made), would result in no gain or loss (or debt cancellation income) being reported for federal income tax purposes.

Generally, there are two anti-deficiency statutes that prohibit deficiency judgments after the foreclosure of Arizona real property of two and one-half acres or less used as a single family dwelling:

  • A.R.S. § 33-729(A) applies to prevent any deficiency from purchase money mortgages foreclosed judicially; and

  • A.R.S. § 33-814(G) applies to prevent any deficiency resulting from a non-judicial trustee’s power of sale under a deed of trust.

Note: For home mortgages originated after 2014, the anti-deficiency limitations have been narrowed and do not apply to developers constructing homes for sale and to a dwelling that was never substantially completed or actually utilized as a dwelling. See A.R.S. § 33-729(C) and A.R.S. § 33-814(H) (2014).

In Helvetica Servicing, Inc. v. Pasquann, 277 P.3d 198 (Ariz. App. 2012), the debtor purchased a home with a conventional loan, then refinanced that loan with a new lender and used the proceeds to pay off the first and pay the cost of a new constructed residence. The debtor subsequently refinanced with Lender #3 and withdrew some cash used for personal, non-residence purposes. The court held, with respect to Lender #3’s pursuit of a deficiency after a judicially foreclosed mortgage:

  • A purchase money obligation retained its character when it was refinanced, even with a different lender. Anti-deficiency protection was preserved for the new loan to the extent the refinance proceeds were used to pay the underlying purchase money obligation.

  • The anti-deficiency protections applied to a construction loan, where the proceeds were used to construct a qualifying residence.

  • The anti-deficiency statute did not protect the debtor from liability for the non-purchase money cash amount withdrawn. “Cash out” sums disbursed for non-purchase money purposes may be traced, segregated and recovered in a lender’s deficiency action.

Example. In 2010, an Arizona single-family residence was purchased for $100,000, with all borrowed purchase money financing from Lender #1. In 2012, homeowner borrowed a total of $600,000 from Lender #2 and used the proceeds to pay off the $100,000 first loan and used the remainder to construct a new residence that was completed and used as a single family residence. In 2014, after making no payments and the property declining in value, Lender #2 forecloses on the secured single-family residence. Under Helvetica Servicing, the anti-deficiency statute would apply to protect the homeowner from liability.