Monday, April 26, 2010

Surplus Money at Sheriff's Sale?

An anonymous commenter posted a question on our February 4th blog post regarding deficiency judgments (Sued – After a Foreclosure). It’s not often we receive a question that we can’t answer quickly… so we thought we’d post the commenter’s question, and the answer, here:
I have a weird one for you. What happens if the Sheriff sale nets more than you owe? Our house was auctioned on Tuesday. We owe $360,000 and it sold for $403,000.
Given the current housing environment in Minnesota… this situation doesn’t happen very often… so we had to run the question by one of the Center’s partners, the Housing Preservation Project. Attorney Jane Bowman of the Foreclosure Relief Law project helped us with the following information. (Thanks, Jane!)

The vast majority of residential mortgages in Minnesota are foreclosed through a process known as Foreclosure by Advertisement (for more information on this process, the Center has a fact-sheet/process chart, here).

In a foreclosure by advertisement, if there is a surplus after a sheriff’s sale, the borrower receives the surplus. However, as often is the case, the devil is in the details. In this case, the important detail is how the word “surplus” is defined.

Before a surplus is established, there is a list of entities that take their cut BEFORE the homeowner:
  1. The cost of the foreclosure sale is covered,
  2. All late payments are paid (with interest),
  3. Any outstanding taxes and insurance are paid,
  4. The remaining amount of the first mortgage is satisfied,
  5. Then any junior lienors get paid (HELOCs, lines of credit, second mortgages, etc.)
If at this point there is a surplus, then the borrower gets the surplus.

For those of you that would like to dig into the statutes, the relevant statutes are available on-line here: 580.09, 580.10 (581.06 covers surplus amounts in a judicial foreclosure).

The statute is silent as to how the borrower would actually get paid… and how to request an surplus funds. After discussing this with Jane and other specialists, we’ve concluded that the local Sheriff’s office more than likely oversees the payment distribution, and if you believe you have a surplus due, you should contact the Sheriff’s office on how to proceed.

There is also another ‘wrinkle’ in this situation… as there may be tax implications of any surplus as well! As it doesn’t happen often… we are unclear on how Uncle Sam would treat the gross surplus amount (in our commenter’s case, would the full $43,000, not the surplus amount after all payments have been made, be considered income?). Any tax specialists like to share their knowledge with us in the comments?

All-in-all… it is most likely that our commenter will see very little, if any, of the ‘surplus’ amount from the Sheriff’s sale, but still may have tax issues on those funds.

1 comment:

  1. I am an attorney, but not a tax attorney. I am also not licensed in MN. Please take this as general advice, and not as advice specific to your situation. (1) The commenter never mentions whether the house was investment property or her principle residence. (2) Also, what did she pay for the house when she bought it? My limited opinion is this:

    (1) If it was investment property the entire time she owned it, she would owe capital gains tax on the amount it sold for in excess of what she paid for it. But, she could take a deduction for expenses like the property taxes, cost of the auction, etc.

    (2) If the property was a principal residence, then there is likely a capital gains home-sale tax break. This article is old, but insightful:

    (3) Finally, if the buyer paid say $405k and sold it for $403k, then there is likely no income tax, because they did not net any additional income from the sale. Unfortunately, I say "likely" no income tax, because if the property was purchased say for $405k as a primary residence, then converted to an investment property when it's FMV was $300k, then sold for $403k at the auction, there would be capital gains of $103k, as the "base" resets at the time you convert a primary residence to investment property.

    I wish this stuff were easier. HTH


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