If an Arizona homeowner qualifies for protection under the
Arizona anti-deficiency statutes, qualified purchase money mortgages are made
effectively nonrecourse.
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:
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A.R.S. § 33-729(A) applies to
prevent any deficiency from purchase money mortgages foreclosed judicially; and
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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:
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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.
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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.
Article © Fred Witt 2014. All Rights Reserved.
Disclaimer: This alert is
provided for general information purposes and is not intended to constitute
legal or tax advice. Please consult with your own legal or tax advisor before making
any decisions concerning your financial or business matters.
