How Does Foreclosure Affect the Landlord?
The foreclosure of a rental property has important consequences for tenants, but it also has ramifications for both the old and new landlords. Until the title is transferred, the old landlord must maintain the property and can continue to collect rent, which would defer some of the tax burden created by the foreclosure. The new landlord, upon assuming ownership, must honor an existing lease or give sufficient notice before evicting tenants.
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Maintenance and Rent
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The old landlord has the right to collect rent from tenants until the completion of the foreclosure process and accordingly retains the right to evict tenants who do not pay. In the same way, the old landlord also is responsible for maintenance, even if under financial duress. The new landlord assumes this right and responsibility upon assumption of the property and must provide the tenants with the name and address of the person in charge of the property. If there is a security deposit outstanding, the new landlord assumes responsibility for paying it back, even if the money wasn't transferred by the old landlord.
Terminating Rental Agreements
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According to the provisions of the Helping Families Save Their Homes Act of 2009, a landlord assuming title to a property after a foreclosure must provide tenants with a 90-day notice before eviction proceedings can be started, as long as they are paying rent that is not substantially lower than the market value for the property. Moreover, if the tenants have a lease agreement with the previous landlord, the new landlord might have to honor the agreement. If the tenants have Section 8 housing assistance, for example, the act forbids using the foreclosure as grounds for termination.
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Tax Consequences
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Unless the foreclosure is part of a bankruptcy proceeding, it could have tax consequences for the foreclosed landlord. Legislation enacted in 2007 allows an exemption for up to $2 million on forgiven debt, but that exemption applies only to debt secured by a primary residence. It doesn't apply to second homes or rental properties. If a foreclosed property sells for less than the mortgage amount, and the mortgage company forgives the difference, the Internal Revenue Service treats the forgiven debt as income. The landlord has to subtract it from any loss he claims because of the reduction in value of the property.
Considerations
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Although the foreclosed landlord has a responsibility to maintain the property until the end of the foreclosure proceedings, financial duress could mitigate the fulfillment of that responsibility, and the new landlord could assume an occupied property in a poor state of repair. It is difficult to evict some tenants, particularly if they are elderly or disabled, although it might be possible to require them to move temporarily so that repairs can be made. To avoid complications, some landlords offer tenants "cash for keys" to entice them to move. The settlement is negotiable, but it is a significant extra expense for a landlord who assumes a property after foreclosure.
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References
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