Dec. 7, 2007

Short Sales, Taxes and the IRS


UPDATE: 12/20/2007 - President Bush signs The Mortgage Forgiveness Debt Relief Act of 2007

UPDATE: 12/14/2007 - Senate Passes Mortgage Forgiveness Debt Relief Bill


Given the current state of the San Diego real estate market, it is no surprise that the most frequently asked question we get revolves around the potential tax consequences of a short sale. A short sale occurs when a property is sold for less than what is needed to pay off any loans on the property. When this debt is cancelled, the lender's obligation by law is to file a 1099-C with the Internal Revenue Service.


The IRS has published Questions and Answers on Home Foreclosure and Debt Cancellation. The following excerpt should provide a starting point for questions to be asked a CPA or tax attorney:

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender.When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form1099-C, Cancellation of Debt.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value ofyour total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.

  Overview of the debt forgiveness bill  - Short Sale and Phantom Tax Debt Relief Overview

Feel free to search all San Diego real estate throughout the county.

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Ken Smith Dec. 14, 2007

Think that most people forget about the tax issues with a short sale. Actually most people don't really look at the whole picture either way, they are just worried about getting out of the home. Good information!

Karen Geselle Dec. 21, 2007

Thanks for getting good information out there. The form to file with the IRS to prove insolvency (see Question 2 above) is IRS Form 982. It must be filed in the year that the transaction closed.

Karen Geselle Dec. 26, 2007

Hi, Bob. Thanks for the link back but it isn't working. Looks like the "dot" between www and was left out. My mistake. Hope you had a Merry Christmas.

Bob Dec. 26, 2007

Thanks Karen. Got you covered. Have a great New Year.

Chantal in Orlando Jan. 23, 2008

Hasn't their been some recent legislation changes regarding this matter?

Tom Jan. 23, 2008

I was "told" by the mortgage broker that my loan is non-recourse. How can I determine if this is in fact the case? In the loan docs there is a section that says: Sequrity: X You are giving a sequrity interest in the property being purchased. Other (describe) The "other" box is not checked & no other property or asset is described. This is the only thing I can find in the docs regarding the lenders colateral. What is your opinion or how can I get e realiable determination on this? (don't really have $ for a lawyer) Thx, Tom

Lisa Miller Jan. 25, 2008

I sold my house to prevent foreclosure. There was still a balance owed on the 2nd mortgage after the short-sale and now, that mortgage company is trying to come after me for the balance owed. Do I fall under this new law of Bush? Can I get this debt relieved? I can't afford to pay them anything and they are ruining my credit.

Bob Jan. 26, 2008

Tom, when we do a short sale and the lender says the loan is non-recourse, we ask them to put in writing that they will not seek a deficiency and that the terms of the short sale include release of the lien and the underlying debt. Lisa, the law applies to tax relief on forgiven debt. If the lender did not forgive the debt, then it doesn't apply. You need legal advise as to whether or not the 2nd can legally come after you. If they can't, then the law would apply.

Tom Jan. 29, 2008

THanks for the tip, Bob. At this stage,It is the lender's position that the loan is recourse. The lender has agreed not to persue deficiency and will release both the lein and the debt.. The issue at hand is potential taxation of the 1099 amt. This is a loan for aquisition that is being forgiven. How can I determine if the forgiven debt will be taxable? Thx, Tom

anna Jan. 29, 2008

Hello, I have to make a decision if to go for a short sale or not. I purchased a condo and now I know that I would have to pay tax on the difference of the short sale and the amount owed. Do you think that I should wait a little more, try to refy . If I do a shorsale how many years will my credit affected? How much time will I have to pay the taxes?

Lawrence Feb. 1, 2008

I am not completely aware of your entire current status, but from my research the foreclosure will pull at least 200 points as were the short sale will be just 40-60pts please contact an attorney I looked through laws to find provisions to help those in risk of being charged through a 1099 for taxes

Bob Feb. 1, 2008

I try not to be over the top here, and I do not like absolutes in areas that are nothing but gray. Credit scores are a gray area. Credit scores are an algorithm. Assuming that the same action affects everyone the same is a mistake. Here are two real life examples of people that started with FICO scores above 750. One saw a 100 point drop after the 30 day late and then another 30 point drop after the 60 day late. The NOD has not been filed. That will be another hit. The other person completed the short sale. There were hits at 30 days late, when the NOD was filed, at 60 days, and when the sale was forgiven. The short sale (which I did not handle) was reported as a charge off and the final hit happened. FICO score now in the 500s. If someone had started with a 600 FICO, the end result could be the same, but each credit hit would be a smaller number. The bigger difference is the recovery period. The foreclosure stays on the credit report for up to 10 years.

Aimee Feb. 1, 2008

My husband and I just closed this morning on our townhouse and it was a short sale. This property was on the market for 4 years! All said and done, we put about 40k of our own money into it. The bank accepted almost 70k less that what we owed. If you are thinking about short selling, be persistant. Our lender told the work-out dept. not to answer there phones. Our short-sale came 5 days before foreclosure.

Catherine Coy Feb. 2, 2008

There is SO MUCH misinformation swirling around the Internet about short sales, deed-in-lieu and foreclosure and how they impact one's FICO score! It's a shame, because Short Sale Consultants gleefully tell homeowners that if they would only short sale, their credit problems will be eliminated or minimized. Not true! Bob is correct: credit scores are an algorithm, meaning that they consist of numerals--not English explanations--to develop a score. Thus, a short sale, deed-in-lieu and foreclosure all show up as Score Factor Code #22--"serious delinquency [short sale/deed-in-lieu], derogatory public record [NOD/foreclosure] or collection agency filing." Regardless of what else is going on in the borrower's credit history (maxed out credit cards, credit history too new or too thin), the hit for any of these three events is the same. The biggest difference is the recovery period--insofar as FICO is concerned, that is. With respect to future qualifying at an institutional lender, the seasoning period for short sale, deed-in-lieu or foreclosure is 24-48 months, depending on the lender. In any event, it's absolutely wrong to say that foreclosure is X point, or short sale is Y point or deed-in-lieu is Z point hit to one's FICO score.

Bob Feb. 2, 2008

Catherine, thank you for chiming in and adding some clarity to the issue.

South Jersey Feb. 4, 2008

Very informative post and great credit score explanation. I guess we will see all the "credit repair" companies coming out of the woodwork again.

Bob Feb. 4, 2008

Already seeing them crawl out from under a few rocks, Jersey.

Kam Feb. 5, 2008

I own two properties that are valued under market and I need to short sale. I lived in both of them for the requisite 2 years of the last 5 years, as described in Sec 121 of the tax code. Does this mean I can claim the exemption of the mortgage debt relief act of 2007?

thomas wimbush Feb. 10, 2008

what is a sheriff sale? is property recoverable before and or after sheriff sale?

Bob Feb. 11, 2008

Thomas, the right of redemption varies from state to state.

Shauna Feb. 12, 2008

I went through a divorce last summer and because of the market, we owe more then what our house is worth. After trying to refinance and explore rental options, we have decided to go with a short sale. However, I'm hearing a lot of different information and am honestly concerned. If the bank accepts an offer 50k less then we owe, is the debt split between us (both on mortgage)? And if so, could I have a potential agruement for a different split given the terms of our divorce decree? (He pays 70% of mortgage, I pay 30 until the sale of home) Also, if my debt is more then my assets, what is considered an asset other then investments? How would I qualify for what Bush passed and not have to pay the difference at tax time next year?

Jinger Feb. 12, 2008

Lisa Miller said: "I sold my house to prevent foreclosure. There was still a balance owed on the 2nd mortgage after the short-sale and now, that mortgage company is trying to come after me for the balance owed. Do I fall under this new law of Bush? Can I get this debt relieved? I can’t afford to pay them anything and they are ruining my credit." Lisa - what State are you in? Was your 2nd mortgage taken at the SAME time you purchased your house, or was it a re-finance? Also, when you sold your house through a Short Sale the 2nd mortgage company would have had to provide a Short Sale Approval/Release of Deed letter agreeing to accept X at closing for release of their lien against the property. In some cases, the wording in the letter states something to the affect that while they are agreeing to release the lien, the promissory note portion of the mortgage (i.e. your promise to pay back the loan) remains in affect. Some lenders even require sellers who want to do a Short Sale to sign 'new' promissory notes, typically for the full amount of the remaining debt. I suggest you check your paperwork and contact a qualified attorney for legal advice on this subject. Good luck!

Jinger Feb. 12, 2008

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. So - does agreeing to do a Short Sale qualify as 'in case of default,' and potentially allow the lender to persue you personally even if the loan is non-recourse. For example when you sign a promissory note to pay off the difference because that was the only way the lender would agree to do the Short Sale? Or doesn't the very act of doing a Short Sale mean that the lender didn't use their so called "lender’s only remedy in case of default is to repossess the property being financed or used as collateral." So in essence...a Short Sale isn't technically a default - which could open the homeowner up for being persued personally even in States such as CA with non-deficiency laws and even on non-recourse loans?

Lisa Miller Feb. 14, 2008

This is Lisa again. I reside in Kansas, no this was not a re-finance. It was a second mortgage at the time of the first mortgage. 80/20 split. Yes, you're so right, the wording in the letter confused me and I signed it for the lender to release the lien on the house so I could sell it and now they are harassing me for the remaining balance owed. I don't believe I signed a promissory note, but maybe I did. I will try to contact a lawyer for advice, but this is crazy. I can't afford to pay on a loan and I no longer possess the asset.

Bob Feb. 15, 2008

Lisa, I'll put you in touch with an attorney experienced with issues like yours who may be able to direct you in the right direction.

Lisa Feb. 21, 2008

We kept out 1st home for our son. He couldn't afford the expenses right now so we had to rent it out until he's in a better financial position. The mortgage is rising and we can't rent it for the amount needed nor can we afford to pay the difference our selves. Will this short sale low protect us?

Bob Feb. 21, 2008

Lisa - it depends on what you are able to negotiate with the lender and whether or not the forgiven debt would qualify. Not all lenders will forgive the debt.

Stacey Feb. 21, 2008

I can no longer afford my home and need out but we owe what our home is worth! We've tried For sale buy owner, no luck! And we've been listed through a realtor for 6 months. Have had several showings but still no sale. And now my nieghbor has put there home on the market. And get this, their's is 6000 thousand dollars less than ours. Their's is a 4 bd ours a 3bdrm.Thinking about a short sale but can't find out information on the laws in Kansas. Can someone help?

Bob Feb. 24, 2008

Stacey, You need to speak with a lawyer and/or tax expert who is familiar with the law in Kansas.

LAM Feb. 26, 2008

I own a home in Northern California (primary residence- owned for +20 years) with equity and I also have liquid assets, the problem is I also own a home in Southern California (1 year 8 months), that is empty (un rented for 7 months now-and the value is $200k less than what I owe) This was a purchase money loan 80/20-never re-fi'd. I have NOT been 30 days late, yet. I can no longer pay the mortgage on the empty Southern, CA home, is it better for me to try and short sale or let it go into forclosure? How do I protect my equity in my primary residence and my liquid assets? Will I be 1099'D from the IRS? And when they say if your debt exceeds your assetts-you will no have to pay taxes on the forgiven amount, does that debt include my current debt owed on my primary residence?(I think it is called "insolvency") Please help.

Joshu Feb. 26, 2008

I have a quick question, I purchased my home inSacramento with a 1st and 2nd loan - 80/20 split. I refinanced the 2nd to make at least try and pay some P&I as my 1st is an interest only ARM (I have not refinanced my 1st mortgage loan). I am now having hardships and am going to miss my 1st monthly payments. Is there additional concerns I should have in regards to a short sale and the refinanced 2nd? Will it be tougher to get them to agree to a short sale or is there different tax issues with a refinanced 2nd? Also, has the assembly/senate passed the California Forgiveness Acts into law yet? I assume at that point, with the Federal Act and the State Laws changed, people in California would have no tax ramifications for the following year as to income tax on thier short sales if primary residency? Is that a correct statement? Please let me know...

Mil March 13, 2008

Thinking of short sale but, afraid of the 1099 that comes after, the lender says I might qualify for "deed in leu of" if the home doesn't sell in 90 days or ig they don't except any offers form a buyer. They require a broker. Who pays the broker fees? The lender said they weren't sure, every investor is different. I'm so confused. I tried for a loan modification & was denied because my income was int he negative, so how do they prevent & help you from going into foreclosure? Live in Florida

LG March 15, 2008

mill did you back request in broker property opinion before denied the modification? the bank will figureout how much they willing to loose that will inclued the Realtor commision but you really need to check in your area, for better information I lease that what i know in california.

Bob March 15, 2008

I apologize for missing a few comments on this post. LAM - Anytime there is debt that is forgiven or cancelled, the lender is required to issue a 1099. With purchase money loans, if the lender forecloses via a trustee sale, they can't seek a deficiency. You should speak with a CPA or tax attorney about insolvency as a solution to the potential tax liability. I work with a real estate attorney who could advise you about your options - walking away, a deed in lieu, or acshort sale. Joshua - if the 1st forecloses and the 2nd gets nothing, since the 2nd is not purchase money, they could opt to seek a deficiency. Same with a short sale. They can agree to let you sell the property, but may require you to sign a note. The key is negotiating a solution that eliminates any deficiency. The bill in California seeks to mirror the Federal law with regard to tax liability associated with mortgage debt forgiveness. Mil - the broker fees are paid out of escrow and are deducted from the proceeds the lender receives. With the deed in lieu, you need to make sure you don't have a deficiency. I have an attorney in Florida if you are interested.

Phuong March 17, 2008

I owed the home for the first is 480,000 and the second is 61,000. and property tax is 6,500. I stuck with the jumbo loan and make only minimum payment. I purchased this property since 0ct 2004. since my husband out of work and was in Hospital and lost income for over 3 months, I can not afforted with any bill paying. we file chapter 7 on oct 2007 was discharge. right now I was late payment for over 3 months, I had contact the bank ( loss minigation dept ) with my financial hardship, they let me make up my payment now. and I continued paying them up to now, I have very difficult time to make this payment for the long run and my husban will be out of work in May 2009 again. One of the realtor suggest me to do the short sale, they told me the new law has pass just for 2 week ago, to relief from any debt I owned from the bank and the property tax and IRS and I don't have to pay them any fees, as soon as I sign the paper and let them deal with the bank. I went on internet to find what was the new law has pass to save people for the short sale in california . but I can't find any thing on the news for the short sale? should I sign and let them deal with my bank? or I should contact my bank? I don't know what should I do now . Should I renting my house for someone and find a small place to leave : Please help me .

Bob March 17, 2008

Phoung, give me a call at 858-382-5820.

Kim March 22, 2008

My fiance has a house that he and his former wife built over ten years ago. They were divorced in 2007, at which time he did a refi to pay off debt and pay her what was thought to be equity in the house. We are in SC. The value of the house is no where near what is owed on the house at this point. We have had the house on the market for 9 months. Three months into the house being listed the realtor gave him the advice to stop paying the mortgage payment and save that money to go toward a downpayment or lease for the next house, as his credit was already shot (around 500), and he was struggling to make the payments each month. Now, as I said the house has not sold, he lost his job in December of 2007, and has tried everything with Litton Loan Servicing to modify the loan, put payments at the end of the loan, or anything to save his house. Short sale was then entertained by the realtor, thus the house price being dropped $50K below what was owed on the house. He now has a foreclosure set for April 7. We did go to an "investor" who has agreed to try to help us and buy the house if he can get it through in the next two weeks, if Litton will accept the offer. My question is, like everyone else, If the amount owed on the house is $480,000, and the investor is able to buy the house via short sale for $350,000 or less, and requests the deficiency be waived, will we be looking at having to pay taxes on the difference that will be sent to us via form 1099C? This is his primary residence as it has been for over 10 years. There is a possibility that we will be able to lease the house back from the investor as well. We already understand the credit problems that will result in this, just are curious about this phantom tax issue.

Jerry B. March 22, 2008

I own 2 houses in the Temecula area. One of them has a balance of 500k and it's value has dropped to the low 300's. My other house has no equity, it's dead even (I live in this house). I can't seem to rent out the 500k house for the price I need to break even. My only choice is to short sale or foreclose. I'm worried about losing my primary house. Does anyone have any suggestions on how t save my primary house? I can afford the payment on this house, just not on both properties. Is chapter 7 or 13 an option??

Bob March 23, 2008

Kim, before you sign anything with an "investor", PLEASE have an attorney advise you on the transaction and approve all documents. DO NOT EVER rely on an investor for advice. To often the "investor' obtains title and the homeowner is still on the hook for the loan. The new law only allows debt forgiveness on that debt which is equal to the original acquisition debt. For example: You owe $480,000 You sell it for $350,000 The cancelled debt is $130,000 Debt forgiveness would only apply to the amount of original purchase money debt that exceeds $350,000. if the the original loan amount was less that $350k, then none of the $130k debt forgiven would qualify. Jerry - call me and I'll put you in touch with someone who can explain your legal options.

Phuong March 23, 2008

Hi Bob This is phuong, I believe you was too busy to call me back on last Thursday after I had spoke with you over the phone. Could you let me know when is the best time to contact you. Thank!

Phuong March 27, 2008

Hi bob, This is phuong , are there any news?

Bob March 29, 2008

Our daughter lost home to foreclosure in 2006 which does not hold benfits of the new law for 2007. They just got the new tax bill from IRS. They may be insolvent, live month to month. We tried to do a short sale, but Wilshire Lending refused offer because sellers would not agree to owe them debt of $50000. So we assumed that they would still owe the debt to Wilshire and waited to get the hammer. No word or 1099 until the IRS bill now. Must respond. Is there any way to minimize this tax bill?

Bob March 29, 2008

Your daughter needs to talk to a tax expert ASAP.

Loree March 31, 2008

Minnesota home purchased in November 2007, can't keep up. ? forclosure vs. deed in leu of forclosure. Home was worth 240 I paid 190, now worth 210. Do you know anyone in Minnesota I could talk with? Thank you!! Loree

Lucy May 1, 2008

I shortsaled my home for $255K (original loan was for $315K) - have not had the funds to pay property tax - am I still liable to pay County Tax Asssesor for property tax? If so, would it be property tax on the $315K or on $255K? Thank you!

Jennifer May 14, 2008

I am in CA and I am in the short sale process with my lender. I purchased my home in 2006 with a 80/20 with the same lender(Countrywide). I lost my job and have not made payments in four months since Feb. I started the short sale in Feb. I owe 540K on the 1st and 130K on the 2nd. My question is the lender came back and said the investor on the 2nd is only going to approve it if I sign a promise to pay. Since this was a purchase money loan in Ca are they allowed to make me sign that? My real estate agent is saying that the law in CA states they can not come after the borrower for the difference on purchase money loans. Please advise

Billy May 20, 2008

Very informative site you have. I am considering buying a condo/home when the market stabilizes but it's just amazing what is really going on out there behind the scenes, that are only offered in the media.

Sheri May 26, 2008

Bob, If our home is gong to foreclose, can the lender come after us for the deficiency once they have auctioned the home?

Faith June 3, 2008

Countrywide approve the short sale of my house, I owed $352k to the 1st and $86k to the 2nd which is owned by mortgage insurance. Countrywide buy out the 2nd for $20k so they can claim the balance owed on the 1099. The house was appraised and sold for $298k. My negotiator faxed the wiring instructions and conditions of short sale to my agent but he did not put in writing that the balance owed on 1st and 2nd mortgage are forgiven and they will not pursue us for the deficiency judgment. I have a purchase money mortgage, no refinance original owner, loan was set up as Jumbo Loans that's why there's 1st and 2nd mortgage. Do I insists on asking the Negotiator that they have to put in writing that the balance owed was forgiven for both 1st and 2nd. There's already 7 buyers backed out due to long process. Please advice. Thanks. Stressed out and depressed, Faith

France June 13, 2008

I was in the verge of losing my home, I tried working w/ financial advisor, helping me on the deed-in-lieu with my 1st and 2nd mortgage. They said that my 1st agreed on the deed-in-lieu, but the 2nd was asking for 5,000. The lady that is working on my case saying that im not suppose to pay that, she will negotiate with the 1st to cover that. 2 days before that i've received a letter from RECONTRUST CO. a Notice of Trustee Sale, stating that the property will be sell on a public auction. 1 day before the 1st morgage co. called letting us know about the property will be in auction unless we do something. Told them I have a company who's working on a deed-in-lieu, but she said that they have not done anything to it that the case was closed May 5 morgage co. didn't approved it. Called my financial advisor saying they been working on it. They said they will call the morgage co. After few hrs i called back my advisor, the manager spoke to me saying " Here's the deal the 1st agreed to the deed in lieu, but the 2nd is asking for 5,000, can you pay that? 5,000 is better Intead of paying 100,000.I said, i can't pay that, I don't have that money. He said, ok that what we gonna say I wasn't even given an options! My question is, what is my option right now? Will the 2nd mortgage come after me? What is my rights? Is there any law that can protect me from 2nd mortgage. Please advise I' m desperate. Thanks.

bridgit June 19, 2008

I need to do a short sale, but my lender won't even look at an offer i have unless i sign a Deficiency note for the amount difference between the amount owing and the amount they sell it for. The offer we have on our house is close to the market value but not any where near what we owe. Can they do that? what are our options? Thanks, Bridgit

Tammie Randolph June 27, 2008

Hi My name is Tammie Randolph. Like most people My husband and I bought our primary residence at the top of the market in 2006. We did a 80/20 mortgage with a adjustable rate hoping to refinance. However with me losing my job in the mortgage industry we are living on 1 income. Applied for a modification with our 1st mortgage lender countrywide however due to our debt to income ratio we did not qualify for the modification of our payments to be lowered. They actually switched our adjustable rate to a fixed for 5 years which made our payment go up $400. If we cant afford our payment now how can we afford our payment with it being increased. My question is, If my husband and I wiere to manage a way to pay our 1st mortgage but not our 2nd mortgage.. Can the 2nd mortgage company try and foreclose. I am so confused and the lenders representatives are not helpful at all.

Enola July 8, 2008

I own a home in Detroit but I now reside in houston. I have rented the home for the past year and a half but it has become extremely difficult to maintain. I have consulted a realtor, accountant and spoken with the mortgage companies (80/20 + home equity). The realtor recommends a short sale and the accountant recommends I buy a home immediately in Houston to "prep my credit" for the hit of the short sale. The confusion is that given the market in Detroit, I owe almost 3 times what I can get for the house (all three loans combined). The entire situation is beginning to really get stressful to where I am just considering quickly buying a house in houston and letting the house in detroit go into foreclosure. Please advise.

Deb July 14, 2008

In a non-recourse state (Tennessee), can a mortgage holder pursue a deficiency on a deed-in-lieu? If they do, should I let it go to foreclosure rather than pay the difference (since deficiencies can't be pursued on forclosures in Tennessee)? And the earlier writers who've had short sales but were pursued for deficiencies, what's the point of a short sale if the mortgage company is going to get their entire amount? I thought that was the reason for doing one--so the owner didn't have to pay the difference. Isn't the definition of a short sale that the company eats the loss?

Robert Aug. 10, 2008

How dare you call this "phantom income!" Forgiven debt is very real income. It's a shame you deadbeats won't pay what you owe, making me owe more. You are very evil, disgusting people. You are communists and freeloaders, trying to destroy America,

Bob Aug. 11, 2008

Robert, few agree with you. With a foreclosure in California accomplished via a trustee sale, or a deed in lieu of foreclosure done correctly, the property goes back to the bank in "full satisfaction of the debt". That means there is NO remaining debt to forgive. That has been on the books in California for likely longer than you have been alive. The short sale is granted by the lender as a means of speeding up the process of selling the property prior to the inevitable foreclosure. The only real difference between what is then considered phantom income or not in that situation is that the lender doesn't have to take title prior to the property being resold. Regarding your fear of America being destroyed, on August 1, 2008, Freddie Mac changed their guidelines for their loan servicers, adding incentives for them to avoid the foreclosure process and pursue the short sale or loan modification workout. It is easy to make sweeping generalities aimed at people you don't know, with many in situations that are no doubt beyond your ability to comprehend, regarding issues you clearly know little about. That said, this is probably the wrong place for you to vent.

Christy Aug. 23, 2008

CA - Short sale situation Bought house in Bay Area with 80/20 ARM in 2002 for $589,000 and had to refi- Jan 2008. We refi-ed $620,000 with 1st and 2nd since we had equity at that time. For loss of income reasons, we are in both a "foreclosure notice" BUT have a short sale situation for $490,000 (approved by 2nd and 1st...both the same bank). The 1st has a stipulation on their approval stating that though they agree to release their security interests in the property...nothing in the approval letter is deemed a waiver of any deficiency balance remaining on the loan secured by the property. They have not required that we sign a seperate note, and my realator said that CA is a single action the lender can agree to the short sale but not necessarily pursue the deficiency down the road. Is that true? Is there a statute of limitations as to how long after closing they can come after us for the balance? Do you have someone I can speak to about this because we are scheduled to close next Thursday and I need to know implications of signing this? Would it be like waiving the "single action" protection?

Anonymous Aug. 27, 2008

Christy - DO NOT believe it. If you sign that document, you explicitly sign away your right to be protected by the "single action" provision. If you want confirmation, hire a real estate attorney. Do not believe your realtor. A realtor is NOT a lawyer and is only acting in his or her best interests - Commission.

Sandra Aug. 31, 2008

I sold an Investment Property will I have to pay taxes on it? I will be filing a Chapter 13 by the end of Dec/08? Thanks. <em>@Sandra - I believe that BK will solve the tax issue, but your BK attorney could answer that definitively for you.</em>

Jon Sept. 10, 2008

RE: Tax Responsibility after a short sale: I cant see the IRS handing millions of middle income families a tax bill for short saling their home. I dont know of anyone that has received a tax bill relative to a short sale. And if the IRS does this, millions of families wil simply file for bankruptcy. That will cause even more havoc in the market and in the courts. The legislature needs to resolve this question and allow the sales to continue without any tax ramifiactions.

Bob Sept. 10, 2008

Jon, not all short sales are the same. I don't expect the Feds to bailout investors or speculators. There are also state income tax implications in some cases. For example, according to the Franchise Tax Board, the current law in California does not mirror the Federal law with respect to debt forgiveness. The bill that would accomplish this is sitting on the Governor's desk awaiting his signature.

Sue Sept. 18, 2008

I bought my home in Murrieta Ca in 1989. I moved to Colorado in 2000 and rented my home to my son for a loss until earlier this year. Because of refis and the current market, my home is now in a short sale with a price of $170,000 on a loan of 257,000. My realtor says we have a good chance of Wells Fargo accepting this offer. Is there anyway to avoid being taxed on the nearly 90,000 deficiency balance? We own a home in Colorado that is valued 30,000 less than we owe and we have accumulated almost 50,000 in credit card debt. We own a 2002 Fi50 and a 2008 Mutang GT that my husband won last year. Can we declare insolvency? <em>@Sue - You definitely need to talk to a CPA about both Federal and California income tax and if insolvency is the best option for you.</em>

Bonita Sept. 19, 2008

I purchased my home for $132,000 in 2003, College Park, GA. In December 2006, I refinanced for $162,000. I currently owe 159,093. In December 07, I was "indirectly" forced to retire. My current TOTAL monthly income is S1,255 from Social Security. I took a lump sum pension (which was very small), which I used to pay off larger debts and live off of from January to August. I've looked for additional work without success. With late fees and proprated additional tax liability for year 2008, my mortgage is $1,387. I am currently two months behind. I have a 2001 explorer that I'm still paying on, and ~$9,300 of combined credit card debt. I am 65 years old, and requested a short sale agreement (Bank of America), although I don't yet have an offer. The only response I've gotten from the bank thus far are phone calls to advise I'm behind in my mortgage, and duplicate mailings to request the same information re: my short sale request (which has already been submitted). I've considered just letting the house go into foreclosure if the bank does not respond or agree, and then follow with bankruptcy to avoid taxes on the difference owed via short sale (if still applicable under my circumstance). I cannot afford an attorney. Any suggestions re: my best approach on how to proceed? At this point, I am not concerned about my credit rating. Thank you! <em>@Bonita - you would need an attorney to file bankruptcy. Most will give you a free consultation. Start there.</em>

Jennifer Sept. 22, 2008

I'm also wondering like Jon on Sept 10th about the millions of people who will have huge tax bills coming after their short sales, etc. How will everyone handle this? It's like a double whammy - people are losing their homes to short sales, etc. and then the tax bill comes.....PART TWO I would guess that most would try to prove insolvency - how would that work? <em>@Jennifer - I think there will be lots of people surprised to find a tax bill. Even more who get one for state income tax. My understanding of insolvency is limited to what I've read on the IRS website - <a href=""></a> I also believe quite a few agents and brokers will find themselves being sued by these very same homeowners who may feel that they got some bad advice from their agents.</em>

Ross Smith Sept. 25, 2008

Another guy in the same boat, My job got tansferred from CA to AZ in 2006. I did not understand what was happening with the market and did not sell. the mortage is 263k and it was just put on the martket for 219k and accepted. In Az i also purushed a home for 212k and it's worth is maybe 130k. Both are intrest only loans. the CA loan goes up 500 in 7.5 years and the AZ house 300 in 7.5 years. I NEVER intended to have either loan for more than a year, i assumed i could refinince or sell. Oh well. sign..... Now I have lost my job and while i probablay get another it will be 2000 less per month. given this tax situation, is short sale or foreclosuere the best approach the best? I never wanted to be a landlord or an invester, but here i am anyway.

Chris Lopez Sept. 29, 2008

Question: I live in CA….I have a fist and a second, both of which are purchase money loans. I tried to get a loan mod several months back and was denied. So now I am trying to short sale. I have had two buyers back out, but I do have an approved selling price from countrywide of $575,000.00……my first loan is $620,000.00 and my second is $150,000.00…….so my question is….should I shortsale or walk away and let the bank foreclose? where are my liabilities and if I foreclose, is there new laws on how long I have to wait to buy another home? If I have non recourse loans……and I shortsell… there anything I need in the shortsell agreement to protect me?

James Nov. 8, 2008

I live in northern California and have a 1st and 2nd with the same lender. I have never refi'd or taken equity lines or loans. My question is which if any of the loans would be considered a recourse loan, taking into account that the 2nd was at the time of purchase and used at the down payment. One more question is, as I live in California am I excluded from the The Mortgage Forgiveness Debt Relief Act of 2007?

Micah Jan. 4, 2009

Had major medical problems and lost my job. We went into the forclosure process. We talked to a guy who was willing to buy the house from us but at half of the amount owed to the bank. If he couldn't at that price, then he said he would just wait until the forclosure auction. We talked to the bank and they agreed to a short sale of 28000. We owed 56000. Everything went through and the paper work and funds were transferred. Luckily the guy lets us rent the house so we still live in the same house but someone else ownes it. This happened in 2008. Does this qualify under the Mortgage Forgiveness Debt Relief Act? Our state is in MN.

Angela Jan. 24, 2009

I lost my job in Michigan in spring of 2007. I moved to Illinois and have lived here since spring of 2007. We both work and pay rent here. We have been trying to sell our home in Michigan for almost 2 years (for sale by owner). We have had to hits. We owe 235000, but our house was now appraised for 165000. We have an 80/20 loan with two different lenders (countrywide and citimortgage). We are considering short sale, but don't know how to start or the ramifications of it. Will we owe taxes on the amount that is forgived? Can the lenders come after us for the 70K? This situation has emptied our savings and we live pay check to pay check and we get behind at times. We are however, current on both mortgages and our rent. Help please.

Michelle Ragland Jan. 26, 2009

I hd to do a short sale on my home in Colorado due to divorce and the fact that the court ordered me to pay my ex-husband alimony almost the amount of my mortgages. I work with a real estate agent that was able to get the loan forgiven. I had a 1st w/ Countrywide &amp; 2nd w/ Citimortgage. The 1st mortgage was able to be paid in full but the 2nd had a deficit $22000. I contacted Citimortgage to see if they were going to issue a 1099 C for the deficit. I was expecting to have to file IRS Form 982, because I had taken out the 2nd mortgage for home improvements. Well, Citimortgage informed me that they will not be issuing a 1099 C to me. Are mortgage companies required to issue a 1009 C for the deficit or not?

Andy Jan. 3, 2012

Hi, I'm in process of shortsale-on my townhouse which has been on market 4 months. I'm very upside down about 100, thousand. The house valued at forty-thousand(I've been sick over this). So I expect cash offers, I recently been informed by my lender that my loan is now with forecloure department. I spoke with the agent who informed me it's not in forecloure it's a process. I feel the clock is ticking, I did just recently got an cash offer. We submitted to lender waiting hopefully everything will go through. My concern is the debt owe and filing taxes.

destinee allen Jan. 15, 2012

I bought a condo at the height of the realest maket in 2004 for $102000....i has to refinancethe house at the terms of the 2nd holder ater 2 that time i took out an extra $47,000 for expenses (about only 2000-3000 for house repairs) and fincance in interest only loan for 5 yrs.....the loan come due & even had that time i had excellent credit but doing to be so upside down...the bank refused to help me out therefore i was forced to short sale...i owed $147,000 and the condo sold for only $44,000 in short sale bank has forgiven me this shortfall but what are my ramificatons from the income is lower that the 30$ of my income on house payments..,,can you give me an idea of whqt the IRS will do.....i know i took out $47,000 .....IS that without a doubt going to cause me a tax riability? the condo was my primary resident the entire time i owned it....please help as i am currently renting a condo and can not afford to pay the IRS????

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