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Short Sale Tip of The Week 6-17-09
Posted on 16. Jun, 2009 by ctlms in Short Sale, foreclosure
What are the consequences of a short sale? Part 2
Ok, this week are going to discuss the tax implications of a short sale.
First off let’s take care of one common misconception about a short sale. When the lender agrees to accept a short sale they have 2 choices. They can write off the loss and the seller will receive a 1099-C or they can pursue the deficiency balance. They cannot do both. If they forgive the debt the seller gets the 1099, if they do not forgive the debt there is no 1099.
Now just because the bank forgives the debt does not mean the seller will receive a 1099. The banks are so screwed up these days that many times they never send it out. That does not relieve the seller’s responsibility to claim it on their taxes however. Though without the 1099 they really would not know the exact amount of the forgiven debt, also the IRS would never have been informed of the forgiven debt if the lender never filed the 1099 to begin with.
It is not the end of the world for the seller to receive a 1099 either. First of all it means that they successfully short saled their home and were relieved from the obligation to repay the difference. Also the tax on the forgiven debt would be substantially less than the debt itself. So the sellers are already in a better place than they could have been.
Most of the time the sellers will owe little or no tax on the forgiven debt. There are exceptions in the IRS code that allow the taxable gain on forgiven debt to be excluded from the seller’s tax liabilities. In Dec. 2007 HR3648 was passed which basically relieved homeowners from owing taxes on forgiven debt if the debt was for a mortgage on their primary residence and the loan was used to purchase the home. If the loan was a cash-out refinance it becomes more complicated as any money not used to pay off the existing loan or improve the house does not qualify for the exemption. And obviously investment properties, which are not primary residences, do not qualify.
Yet another exemption which has long been used to exclude the tax liability of a 1099 for debt forgiveness is the Insolvency Exemption. Basically this rule states that if the seller is insolvent they will not have to pay the taxes. The IRS considers you insolvent if your debts exceed your assets. If the seller just had to sell their home for less than they owed on it, it is pretty likely that their debts will exceed their assets since most peoples homes are their only real asset.
Obviously your sellers should always seek a competent CPA for further clarification of the tax consequences of a short sale and what will be required when it comes time to file their return.
Next week we will discuss the deficiency balance.
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Bio
Sean Wilder started in the pre-foreclosure business in 2007. Previously he enjoyed successbusiness in the transportation industry, real estate investing and as a licensed Realtor. Sean brought the same determination and work ethic that lead to great success in his previous businesses to Loss Mit Services based in East Windsor, CT. His focus, combined with his drive to succeed, have been essential to his success as one of the area's top short sale negotiators.
Known for finding creative ways to overcome hurdles and never ending persistence; Sean, believes in the power of team. Sean and his team are in the trenches everyday, plowing through challenges and objections while negotiating with various lenders, and finding solutions to difficult problems. It is this daily experience that brings Loss Mit Services consistent success and provides them the knowledge to share.
Sean belongs to a number of industry groups and associations that allow him to collaborate, share, learn, teach and stay updated on the latest changes in the pre-foreclosure industry at the federal, state, local and lender specific levels.
Effective Oct 1, 2009 all debt negotiation companies that offer loan modification, short sale, or foreclosure rescue services needed to be licensed by the CT Dept of Banking. Sean and his company Loss Mit Services were the 1st to be awarded the Debt Negotiation License NMLS # 828273 which can be verified at the CT Dept of Banking Website by Clicking Here. In addition, effective Oct 1, 2011 Debt Negotiators were required to also be licensed Mortgage Loan originators and Sean also has received this license, NMLS# LO-831853.
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