Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties.
Often, people tell me they are discussing “short sales” with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.
The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.
Short sales are looking even better right now. I noticed the inventory is raising locally. Might be a good thing for investors.
Am I wrong here or has the law changed on this matter? I thought the could no longer send a 1099.
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The laws have definately changed some in regards to the debt foregiveness and taxability if it is your primairy. Lenders are also much more likely to no seek a deficiency repayment lately it seems.
I just bumped into this article. It needs to be updated, laws have changed. I’m not a CPA or attorney but my understanding is that if it’s primary residence then you don’t have to pay taxes under new mortgage relief act 2007. Short sale is better than foreclosure.
http://BayAreaShortSaleSpecialist.com
foreclosure and short sale you will have to pay IRS as both have consequences of “Debt Forgiveness” please review the IRS rules first before you decide. The lender has to issue 1099-C to you and even if you do not get the IRS says you still have to file and disclose. Not getting a 1099 is not an excuse not to file. My fear is all these people doing short sales and letting properties go into foreclosure. I am a realtor in florida and people are doing short sales without consulting their CPA or an attorney first…which is a big no no.
If you agree to do a Short Sale the lender will forgive your deficieny’s and it is better for your credit. A Short Sale will effect your credit for only two years rather than a Foreclosure for seven or more. You need to be behind more than 3 month’s to do a Short Sale. We can help you and our services are free.
Short Sales Get Partial Doc Stamp Relief
The new Florida real estate law dealing with short sales lowers the amount of state taxes residents pay when they sell their homes through a short sale (the sale price is less than the outstanding debt). The state will not collect taxes on the canceled debt, or the difference between the sale price and what is owed on the house.
Yes, A Short Sale can be done on a second home.
It is always better to do a Short Sale as your lender wants to get the property back. They are more agreeable not to come after you for deficiency judgments when you let someone help you with the process. A reputable company will handle your whole short sale sale start to finish and then a buyer will have a new place to live. Everyone wins.
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It should be illegal for Real Estate Brokers to list a property as a “potential” Short Sale in the MLS. Before it is listed all the lender’s should provide verification that the list price is approved by them and the property will be approved by the lender for short sale. The Banks are wasting untold time and money of the public going through a process that is ass backwards for months then at the very end state the seller does not qualify for a short sale. The regulations and laws should be a uniform process for all lenders and banks. Sellers should apply for binding short sale approval before the property is listed in the MLS.
EB we help people with exactly the same situation on a daily basis. Contact me or my office if you would like further explanation or want more information regarding short sales.
Visit http://www.shortsaleops.com for contact information.
My property in Fla. is almost finished with the short sale.The bank has forgiven the debt.Now, I find an investor has come out of the woodwork and demands $25,000. from me.What do I do?
You need to think first before making an action to avoid regret. Like this short sales, if you are not aware enough of the cause and effect on it, you will regret of your decisions.
Great.. i was expecting some thing like this only really thanks for sharing it.
Not knowing the difference between a foreclosure and a short-sale, the realtor I worked with convinced me the short-sale was best – big mistake on my part. Now, the bank has “forgiven the debt of 59K but the IRS sees this as “income.” At age 73 this is a nightmare! Does the IRS forgive anything? HELP
I read this content you have done great job
Until 2013 though, deficiency written off by a lender for a short sale IS NOT considered as taxable income. Correct?????
This answer is for EB, I went through the same situation . I have tried many revenue. The bank won’t aproved deed in lieu. I went through 4 short sale in 15 month and 9 months with the same buyer. It has finally approved and went to closing. in the same evening I was served with foreclosure summon from the court. Talk about saving by the bell. I will have to pay tax on deficiency. An accountant will set up a monthly payment to IRS . If you have foreclosured, Florida can come after you for the next 20 years. We just have to suck it up and pay. Good luck to you!
Headed into Short Term Disability that is 1/2 pay and roughly $300,000 underwater (we owe $630k on my 2007 Mortgage in Florida on a house that Zillow rates as $328,000). What is the likelihood we would get a Short Sale Approved with a deficiency waiver? Especially as I head into the hospital in a month or two.
Joy,
I understand your frustration but until HAFA came into existence, most lenders wouldn’t even discuss the possibility a short sale without a purchase contract for review. HAFA, however, has been less than stellar in its success and in my opinion has done little to assist distressed homeowners.
Best of luck trying to mandate how ALL lenders, investors, mortgage insurance companies, etc. must abide by a uniform code. So far, it hasn’t shown any signs of success.
Due to a job change, my husband and I were forced to relocate from Florida to Georgia in 2009. At the time, our home in FL was valued at approx 80K less than our mortgage balance, so we opted to rent it rather than try to sell. Since then, the value has continued to fall, and the value is now 100K less than our mortgage balance. We have been unable to keep it rented, and are struggling to pay the mortgage. We currently live in an apartment in Georgia and are expecting our second child. If only we could get rid of the house in FL, we could provide a better life for our children and move out of this apartment and into a house in Georgia. Is there any way that we can get out of this without having to pay the 100K or the taxes on it? We’re trying to conserve our credit as much as possible as we are a young family.
My wife and I are about 50,000 upside down in our home. We both want to go on our social security but can not afford to. We are both worn out from our jobs and want to retire. Can we look to short sale as a way to get out from under the burden? We have some savings and ira’s…must we spend them or lose them?
I recently sold a property that had a first and second mortgage via short sale. Both mortgage companies accepted the amount of monetary funds they would be receiving. Two months after the property has been transferred to the new owners, the second mortgage company is now coming after me saying i still owe them the remaining balance of $43,000.00. I know there is now a law in place in Nevada protecting people from mortgage companies coming after restitution from short sales. Is there any similar laws in Florida that are in effect? Please let me know.
@ Dar Car,
You should be protected by the 2007 Mortgage Relief Act which has been extended until 12/31/2012.
Please visit: http://www.irs.gov/taxtopics/tc431.html
You have to report this weather you receive a 1099 C or not when you file your tax return; however if you qualify then you will not be taxed on this “income”. If you can prove you were insolvent at the time then you should be safe. However if you have money and just decide to foreclose / short sale because you are so underwater then you have something to worry about.
Something else you should be aware of… There are some states that ban lenders from collecting the remainder owed on a loan after a foreclosure or short sale is completed; however some states allow banks to come after you for up to a certain amount of time (in Florida up to 20 years!).
Good Luck!
-AJ
To Mark in FL. You wrote that you did two short sales , one in 09 and one in 2010 with no negative feed back from the IRS. I’m getting ready to close on a shortsale with Bank of America and I’m so scared that they will 1099 me and I will owe the IRS taxes on $40,000, (the shortage amount) I can’t sleep I’m so worried. Did you get an Estoppel from your lender? Thanks, Dar
We lived in our primary residence for 10 years. It has been on the market for 4 years We also own a second home. We changed our homestead exempt to the second home in 2010 and have moved into it so that we can proceed with either a short sale or foreclosure on the first home. We concluded it would be less costly monthly for us to do this. We have lost our construction business and our jobs. We are now concerned that th first home will not be considered our primary home and we will not be eligible for the $250,000 exemption offered under the tax relief act of 2007. I read that if we live in it for 2 of the last 5 years we can still consider it to be our principal home. Is this true? We owe $650,000 on our first mortgage and $260,000 on the line of credit/ second mortgage. We have been told that a short sale may only bring $450,000. Would we be better off to go through with the short sale or forclosure for tax liability purposes? We have already accepted the fact that our credit is ruined.
Sorry about the caps on last post. I should have said after a short sale closing, how can I stop the ex-owner from staying 1 week until the end of the month? We are in Florida if this helps. Just need to know if I should even bother and just let them stay the week as it would be more trouble to fight 1 week than to just let them finish the month? Please let me know if I needed to get in there do I have any rite to lock them OUT!!!! Thanks, Paul
HOW SOON AFTER THE CLOSING HAS BEEN SIGNED DOES THE EX-OWNER HAVE TO GET OUT OF THE HOUSE. THEY ARE SAYING THEY WANT TO STAY ONE MORE WEEK TO BE ABLE TO GET THIER THINGS TOGETHER BUT WHAT IF i DON’T WANT TO LET THEM? dO i CHANGE THE LOCKS, OR WHAT CAN i DO?
I did two short sales; one of my primary in Sept. ’09 and an investment property in April ’10.
So far, neither has had any negative affect on me other than my credit report, but I knew that going in. The weight off my shoulders was amazing.
The sale of my primary resulted in a debt forgiveness of over $150k and I believe there is a law in effect that will negate the IRS taxes due on this, but check with your tax advisor.
Also, there is a tax form that you can complete that if you are insolvent (broke, essentially) when the debt is forgiven and you can prove it (bank statements, credit card statements, LOC statements, etc.) then the tax on your debt forgiveness is negated as well.
If only I did some research before my short sale I would feel better about it.I’m not sure if this is a good deal please help..I feel behind due to loss of hours at work and the value of the home was cut from 127,000 to 25,000.My wife and I decided to short sale and rent on a better side of town. So I contacted a close friend who is a Realtor and she started the ball rolling.After a year and 2 months we finally have a buyer.So we are now getting ready to close and Bank Of America wants us to sign a promissory note with $250 for closing cost with an agreement to pay $3,000 as well.Is this right so far?? Now I;m worried about the 1099, what should I demand from BOA to not get hit by IRS? I’m not so worried about my credit would foreclosure be a better option and do you think my Realtor would be pissed about not making a commission If I decide so. I do not want to owe IRS I am already in debt to them. C Mc in Fla
Does anyone know of any legal recourse out there against a bank, for a homeowner, if you are attempting a short sale and the bank has all of the information they need to include a buyer’s generous offer and the bank simply stalls. Then after months of stalling, say 6 months, either the buyer bails, or you receive notification of a foreclosure.
I am convinced banks do not care about loss, for they have already been subsidized by the fed.
My PMI wants $10,000.00 on closing in order to allow my short sale to go through and they will not release me of the note. Is this normal?
If the house in question is a primary residence and has been such for a number of years, this may have little impact on taxes. Aren’t those capital gains exempt from taxes? I would like Mr. Alper to comment on the situation I described to confirm or correct my information.
I short sold my house end of sept 09 through USDA. I am now trying to get the bank to work with a settlement on the 50k differance. I am not able to get any answers. What should I do. And I am getting married, is He going to be responsible for the remaining balance or can they go after him. since in FL.
Can a short sale be done on a second home?
I am in the process of selling my condo in Broward County Fla. by a real estate agent as a short sale. My bank is GMAC mortgage. I am completely upside down with an outstanding debt after the sale of approx. $205,000. According to GMAC, they will forgive this debt but they would not give me an answer as to whether of not they will 1099 me. Does anyone have an answer to this? They say it depends on local law. I find this hard to beleive since the 1099 is Federal. Please help me
I am just beginning the pursuit of a short sale and the property has been listed for one month. I did not make my mortgage payment the beginning of August and will continue in this manner. I have been told by someone at a title company who is experienced in handling short sales with Wachovia that the “package” will not be filed with Wachy until three months have elapsed.
1. How do I know if Wachy will make me sign an unsecured note for the difference between the purchase price and the selling price?
2. Does the Mortgage Foreclosure Relief Act of 2007 cover short sales or just foreclosures?
Appreciate your advice.
Thank you.
i am a renter in the keys and my landlord is selling this house through a different company then what rented the house from, and they still want last months rent even though we have a good chance of having to move, what are my options?
Sharon according to jimbo’s link to the IRS if it was an income producing investment property you should be able to offset the capital loss with the imputed income.
State: Florida.
My short sale was approved. WaMu sent me the demand letter and they included a sentence: “WaMu reserves the right to pursue collection of the remaining balance due on the promissory note for loan number XXXXXXX” which is my HELOC. After talking to a lot of people at WaMu and explaining my specific situation all the way to VP level, they agreed to remove this wording from my demand letter and they removed it. I have the new Demand letter 03/18/09) expect to close on 03/31/09.
Is this enough for me to feel free from them trying to collect after the sale?
… or will they still have that right even if they don’t put it in the Demand Letter?
… this is my homestead home (primary residence).
… If they still have the right to try and collect, for how long can they attempt it?
… what can I do to prevet them from comming after me after the sale?
Thanks
IMPORTANT CHANGES TO THE LAW CHANGE THESE ANSWERS!!!!
The answers here just prove the point that you must consult very competent and timely legal and tax counsel to get the correct information. Some of these answers were right at one point in time and are now dead wrong.
The Mortgage Debt Relief Act of 2007 provides 5 situations in which the discharge of mortgage debt will *not* incur any tax liability.
http://www.irs.gov/irs/article/0,,id=179073,00.html
Form 982 is used to show the IRS that you fit one of these categories. Then, even if you receive a 1099 from your mortgage lender, the amount may be excluded from income, and hence no tax owed.
my husband put his name on a investment property for his son.. son can not make payments,so it is all on my husband and he is 86 and on fixed income.. so property is being sold as short sell with the fear of a 1099 , owing money to IRS WE DON’T HAVE..
WHAT SHOULD WE DO.. let it forclose,file bankruptcy.. i don’t want to make a HUGE mistake.. the realestate agent is making 14,000. On short sell.. buyer is getting property
cheep ,the son has not a care in the world.. so we are left holding the bag..
what should we do.. thank you for any advice,sharon
I am in HUGE trouble. I was an investor and was doing well until I went in with a partner on a 96 unit hotel. He took me for everything and is in jail now, however I am foreclosing on 2 properties, have no job, no money left and now I’m afraid to file bankruptcy for fear that I will still owe money after I’m done. I do not even know who to talk to because I have no money to pay no JOB and I have a new baby. If anyone can give me some advice. I just was served with papers for foreclosure on my home. I am looking for a job in the mean time if you can help me sift through this I would appreciate it. My attorney I feel is just looking for his fee.
Lawyer’s are Idiots! They want people to foreclose- they make $40-$50,000.00 on a foreclosure. So of course they are going to advise you to go ahead and go into foreclosure. Foreclosure will cost you more than a few thousand dollars in tax money. Anyone selling a property as a “short sale”- should not expect to get out scott free. Just run the numbers and see the bottom line.
Who is right? I am confused! Do you still get a 1099 if the property goes into foreclosure? I need to be 100% sure before I make a hugh mistake. Thanks Stacey
As a CA homeowner, w/ substantial equity and some cash asset…who would like to foreclose or deed in lieu on an investmt residential home in Cape Coral- what backs up this comment of your, “Many mortgage lenders will not pursue debtors for deficiency judgments”.
i don’t have any way to protect my assets in CA, that i know of….so i sure hope you know what you’re talking about.
any further help w/ this, gladly appreciate. my loan is Chase.
donnab2@pacbell.net
does this mean that no matter if there is a short sale OR if the property goes to foreclosure that there will be a 1099 that we are responsible for not matter what? And what if we declare bankruptcy AFTER the foreclosure (if the bank comes after us for the deficiency and sells the property before we have time to declare bankruptcy), are we still responsible for the taxes on the property?
Is a Deficiency Judgment from foreclosure dischargeable in bankruptcy?
I object your conclusion becuase of:
1. The law allows the lender to send a 1099 for the balance also in case of foreclosure
2. In florida, the foreclosre is a judment will enable the lender to go after the borrower with a deficiency judgment
3. The IRS exempt from the tax liablity when the recipient is insolven. Read IRS publications 544 and 908