1099 and deficiency judgement

I am trying to short sale a property and the woman is scared of the tax implications. My question is…

In my contract i ask the bank to put in writing that they will waive their right to a deficiency judgement. But if they do this do they still send her a 1099 for the difference?

She owes 90,000 and I am planning on getting the property between 70,000-75,000. So I am wondering if she will have to pay taxes on the extra 20,000 even if they waive their right???

And if they do have the right how many times have people had that they actually do it?

Can i write in the contract that they also waive their right to send a 1099?

I hope this is the right forum, i’m new to this. And this is my first short sale so i dont have all the answers to give to the homeowner.

they don’t have a “right” to send a 1099 that they can waive. It’s an IRS “requirement”.

forgiven debt is taxable.

Okay, forgive me i’m am so new at this.

So they can waive their right to a deficiency judgement but have to file the 1099 because it is an IRS thing?

I’ve heard you are great with advice so i’m glad you are the one that responded.

THis is my first short sale so i am trying to answer all of her questions correctly. This is a deal i’ve been waiting for for almost 3 months and I dont want to lose it. ITs a lady with 2 houses and doesnt owe much. I could basically pay off the loan with the sale of one house and the second would be pure profit. Somewhere around 50,000.

Anyways she just is iffy cause she does not want a lot of taxable income. So if i short sale for 20,000 less than what she owes she will have to pay taxes on that. They were rental properties so she did not live in them, if that makes a difference.

Then I thought maybe i could give her the money to pay what she would have to pay in taxes to pacify her? I’m not sure if that is legal?

Regardless of what she owes, her profit will be the difference between $90K and her cost basis. If she originally bought the house for $30K, her potential profit on this deal is $60K.

That $60K is going to be taxable somehow, as capital gain, forgiven debt, or some combination of both. You did not really give us enough information in the first place to answer your real question.

The reason I can make so much is because there are two properties involved. I am only shorting the bank because she said she did not want to sell them outright because her lawyer told her not to??? . He told her something along the lines of “she would get hit with having to pay close to 30,000 dollars to the government???” I’m not sure why but I am not going to argue with her because i am not a lawyer. (they are both rental properties) I am only shorting the bank because she told me thats what she wanted done. I dont ever try to screw anyone, i worked with my mortgage broker to see if we could find someone to help her refinance and no one would because her credit is too shot. I also talked to the bank on her behalf for a forebearance and they said no way. I always try to help the homeowner keep their property before i do anything else.

In regards to how much i am making I was told that giving the homeowner any money was completely illegal so unless someone can tell me otherwise i really dont feel like getting arrested.

I wanted to make sure about the whole 1099 thing before i even made an offer on the house, because i dont want her to get hit with high taxes and thats why i said i would give her the money but i dont want to do anything illegal.

This is my first short sale, so i am learning and dont want anyone accusing me of ripping someone off, I thought anykind of short sale was a win-win situation.

I could make up to 50,000 but i could also make as little as 10,000 I dont know. The houses are very old and one doesnt even have a furnace. So I COULD make up to 50,000 and thats just cause there are two houses involved.

Qustion for DAVE T
I dont know what her original purchase price was on the homes. Probably not that much, she has owned them for 30 years. But she refinanced about 3 years ago. And this is where she got herself in troupble. So would the capital gains be on the refinanced loan or the original loan, i’m confused.

Thanks for all your input.

letting her receive cash in the deal is not illegal in any way. property can be, and is, sold for cash every day.

remember, paying taxes is good. it means that you made money. she gets to keep 60 to 80% of it. counseling her to “avoid” making $50,000 so she won’t have to pay $20k in taxes is insane.

any forgiven debt will be reported on a 1099. In this case, it will be added to what she receives for the property in computing her gain.

bought it for 30
owes 20
sells it for 40
bank forgives 10 of the 20 owed

her capital gain is 40+10-30 = 20. but she walks away with 30 in cash (before taxes).

the math works a little different if it’s a loss.
bought it for 40
owes 20
sells it for 35
bank forgives 10 of the 20 owed

she has ordinary income of the 10 forgiven
plus a capital loss of 35-40 = (5) cap loss. but she walks away with 15 of cash before taxes.

The difference between her cost basis and the (short) sale price is her capital gain. The amount of debt above the sale price that is forgiven is ordinary income.

Thanks for the input.

I was just told by the trainer that did my short sale class that if the HO walks away with any cash it is basically “stealing from the bank” in regards to a short sale? So i was just worried. They said the only way we could put money in their pocket was to like pay for a moving service or buy things from the homeowner with a bill of sale only? THats why i was confused when you said i should be giving the ho more money?

Thanks all

I just hope this first one works out, i spent a lot of money on my classes and to tell you the truth now i know i didnt really learn what i really needed to.

it’s not “stealing” if the bank agrees to it. they may not agree, but if it’s in the contract and everyone is aware of it, then it’s not illegal.