I've recently heard that if a home owner sells their home in a short sale they will be sent a 1099 tax document by the Federal goverment. The home owners are selling the home for less than what is owed and the goverment considers the loss "income". If you owe $140,000 and short sell for $100,000 you will be sent a 1099 for the income of $40,000. If the home is foreclosed on the same thing will happen, only difference is the seller is working to sell, they just walk away. Under both situations your credit is ruined. How does one know what the best choice is? What is your view?
I have attached a copy of the IRS Mortgage Forgiveness Debt Relief Act of 2007 (Which was extended last year through 2012) that allows I believe up to $500K for a single person and 1Million for a married couple in mortgage debt forgiveness for the sale of a borrowers residences.
There are also ways a good CPA and also do it with investment properties as well...
But they DON'T have to pay taxes on debt forgiven on a primary!
Thank you! I just was talking to someone today about this IRS Mortgage Forgiveness Debt Relief Act of 2007. But when I was working on a Short Sale Listing the Bank up front told the sellers on their Phone Interview that they would be get a tax 1099. I was unaware of the Debt Relief Act so what could I say to the seller after the bank just told them that they would get a tax 1099. I did tell them to talk to their CPA. This did make the Seller back out of wanting to do the Short Sale process on their home. It is nice to have this pdf file for any future similar situations.
They'll still likely get a 1099 Linda, they just won't have to pay taxes on that deficiency if it meets the requirements. I'll usually state the obvious to borrowers, give them the doc., but remind them that I'm their agent, not their CPA!!
Kay, definitely not a good idea to tell borrowers specific numbers. Its a reality that if a borrower is late on many debts for some time, in major debt, and in full mortgage default, a short sale will actually IMPROVE their credit score in many cases. Same thing with a bankruptcy. Obviously getting RID of the debt and no longer having the late payment report will help. If they are never even late on a payment and have a high score, it can still effect them upwards of 100 points. 50 points is about average, BUT the average late payment is 30 points+ each!
A foreclosure will typically range 200-300 points. A borrower can qualify for a fannie mae loan in as little as 2 years after a short sale.
There are no definitive decreases that can be predicted on a borrowers credit for a short sale, foreclosure, or really any derogatory reporting item, as there are MANY variables and factors that impact credit scores
Thanks for the information. This is my first night as a member and I got one of my burning questions anwered! I have represented the buyer on all of the short sale transactions that I have done and now I am listing one so this is definitely helpful information! Thanks again.
Not that there are very many in this price range, but caps for property value in the Debt Relief Act are actually 1 mill for single individual and 2 mill for a couple. As Mike stated there are other possible remedies for taxes on non primary properties based on current insolvency, etc. Another good reason to take care of the short sale prior to BK in many cases. Definitely a good idea to have a good CPA that fully understands this area of the tax law to refer them to.
I spoke to a tax attorney for about half an hour a little over 5 years ago when I was first getting involved in the foreclosure market. When I asked him if there were any situations that it would be better for the homeowner to not do the short sale because it might harm them in some way, he flat out said "I can't think of one instance that a foreclosure would be better than the short sale".
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