Tax Time, Foreclosure, Short sales, some people may owe some big tax bills, been watching the news lately on this... some ideas I'd share about it..
How Does a Short Sale Affect Me With Taxes?
Being that I am not a tax advisor I will not get into this question and topic too deeply, and also I have attached numerous great articles from the IRS, and attorney’s below for further reading about short sale taxes and the 1099 the homeowner could receive in the future. We will want to make sure that the short sale expert negotiator does his/her best to help you out. I have listened to many experts and been to many short sale seminar and training, and they all seem to have a different view, or at the very least explain it in a different way. As a general rule in Minnesota, when you go through the foreclosure process, that lender who does go through a standard 6 month redemption by the way of advertisement has in effect relinquished their rights at coming after the borrower for a deficiency judgment on the short sale. However, you are looking to sell the property for less than what is owing before it would go back to the bank. Therefore with this situation, when the short sale negotiator talks to the bank they will need to get a letter approved by the lender to waive any future deficiency judgment against the seller and consider it a “full settlement paid in full”. Please keep in mind that lenders can still come after anyone that signed on the original promissory note that guaranteed and signed this note. In addition the other lien positions didn’t initiate the foreclosure, so they still have the right to come after the seller for a deficiency judgment. Also many lenders will do what’s called a “partial release” where they detach the lien (mortgage) from the property so that the property can be sold and clear title can be passed to the next buyer. Depending on the negotiations with the lender, this promissory note can become a judgment and the lender can later come after the homeowner for that amount they guaranteed. Also please keep in mind if you sell it on a short sale, or the bank ends up with it back, eventually their will be a “loss” showing to the lender of which the lender will take that difference (amount owing – amount sold for) and even if they don’t’ come after you for a deficiency judgment they can always pass that information onto the IRS, and at the timing and choice of the lender can 1099 the homeowner possibly 1, 2, or 3 years later when it would make sense for the IRS, to show it as a loss on their tax records for that year. This part of the transaction can get pretty complicated, so I think you should seek advice of a tax advisor, I would also recommend you talk to Todd Rooker on this as well as he can put you in touch with the right tax advisor. Please check 2007-2008 recent guidelines changes by the IRS, as they have changed some rulings on forgiven taxes for certain owner occupied situations, this began as a 2 year rule and got extended for more years. Also new legislation came out in 2008 that benefits you to do a short sale over letting the house go to the bank when it comes to writing off taxes, so please check into this recent ruling. Most investors may want to look into the term insolvency to see if that applies to their situation showing that their liabilities exceed their assets, check with your account on this as this may be a way out of paying taxes.
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