Short Sales - Will You Have to Pay earnings Tax?

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Short Sales - Will You Have to Pay earnings Tax?

Many people will be bewildered by that question. Who ever heard of paying revenue tax even when you sell you home for a loss?

Short Sales - Will You Have to Pay earnings Tax?

Well, the Irs has a microscopic known habit of charging people revenue tax on debt that they were responsible for paying and were relieved of that responsibility.

This could have been straight through a foreclosure, where the house was sold for less than the excellent debt, a mortgage restructuring where the number of the loan was reduced or straight through a short sale.

Just for the record, a short sale is where the bank lets person sell their asset for less than the number owed to the bank.

Why would the bank do this?

Because they would rather take a known loss than gamble and perhaps face a bigger loss later. If they were to foreclose on the house, there is no telling how much they could get sell it for at that time. In a declining market like we are in now, it is virtually clear that the longer the bank has to hold the house before being able to sell it, the less they can sell if for and the larger the loss they would sustain; especially with the legal costs and fees for doing the foreclosure, the loss of interest income, security, repairs, executive expenses, etc. You can see the logic.

The short sale is not in fact accomplished, however; especially for person with microscopic or no taste in the process, like a homeowner.

First, you have to find the right agency in the bank. Most times when the borrower calls the bank, they are directed to the collections department. Their aim is to get the borrower to send in payments, so they can make a commission.

Borrowers in fact need to associate with the Loss Mitigation department. They are charged with limiting the banks losses.

They will ask financials on the borrower to make sure they cannot afford their payments and are not just trying to get out of a tight spot.

They will also need a Bpo, a Broker's Price Opinion. This is an estimation of current fair market value for the asset given by a realtor, which should include any costs of repairs. This is a big factor in the bank's decision of how much the asset might be sold for and therefore how much of a discount to allow.

Finally, the bank would prefer to have a great buyer lined up to buy the property, since they do not want to prolong the process any more than they have to after approving the short sale.

The above process takes months. There is a lot of going back and forth, lost documents, requesting supplementary data of the borrower, speaking with separate people all the time, etc.

I have seen cases where the borrower was still negotiating with the bank when the foreclosure proceeded and the house was lost to foreclosure in the midst of negotiations. This is in fact a process that calls for an experienced negotiator, knowledgeable about the process and the institution.

Ironically, if the short sale is consummated, the borrower's troubles may not be over. The bank may continue to pursue the borrower for the deficiency, the discrepancy in the middle of the sales price and the mortgage balance.

There may be a chargeable issue for the borrower as we mentioned.

In the past, the bank would issue a 1099-A for the number of the bank's loss to the borrower and he would have to pay revenue tax on that amount.

However, the government has passed a law that excludes clear borrowers from this tax.

The Mortgage Forgiveness Debt Relief Act of 2007 says that for foreclosures, short sales and mortgage restructurings for less than the current equilibrium on the mortgage, there will be no tax on the forgiven debt, if...

The debt relief was incurred in the middle of 2007 and 2009 The debt was for buy and correction of the house The debt was secured by the borrower's customary residence The number forgiven was no more than Million for a married couple

So, you can see if you did a short sale on a rental asset or even a vacation home, the tax would be due.

If the mortgage on your house was a cash out refinance to pay off credit cards and to buy another asset or to take a trip or pay off curative bills, the insufficiency would be taxable.

In these cases, the only way around the tax would be for the borrower to contend bankruptcy, as the Irs says that if you are provably insolvent; you liabilities are greater than your assets, you will not be liable for the tax.

If you are trapped in your house; you can't sell it because you cannot get more than the mortgage balance, get in touch with a knowledgeable, experienced short sale specialist to help you.

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