First post and obvious newbie. I heard that homeowners get 1099 from their lender on remaining balance.
Is this true? And if so, do you let them know this advance?
Lenders issue a 1099 for any debt they forgive in a short sale.
This is what the government calls the “Phantom Tax” and there was an article posted most recently regarding this tax.
Daily Real Estate News | October 5, 2007
House Votes to Eliminate ‘Phantom Tax’
The U.S. House of Representatives voted on Thursday to get rid of a tax burden for homeowners who have had a loan forgiven or foreclosed on their home because they were unable to make their mortgage payments. The Mortgage Cancellation Tax Relief Act, H.R. 3648, passed by a vote of 386 to 27. Similar legislation is making its way through the Senate.
Since the early 1990s, NAR has supported such measures to eliminate the “phantom tax” on financially- strapped home owners.
“Congress made a good decision that will affect many Americans who find themselves in a truly bad situation,” says NAR President Pat V. Combs. “Changing the IRS code is an issue of fundamental fairness. It would relieve a tax burden at a time when an individual or family has experienced a true economic loss arising from the sale or loss of their home. These families are already in financial distress and are most likely unable to pay additional taxes.”
The current tax code requires a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether it is a short sale, foreclosure, and deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt. If the property is sold at foreclosure or is sold for less than was borrowed, that difference is considered income and is subject to the tax.
H.R. 3648 would ensure that any amount forgiven on mortgage debt secured by a principal residence would not be taxed. The legislation has a provision to safeguard against abuses. That provision is similar to one that already exists for commercial real estate owners and would treat commercial and residential property equally.
"This is not only about the subprime turmoil we are currently experiencing, " Combs says. “This is also about families who have lost their home or a need to sell that home for less than the amount owed on their home mortgage because of job loss, divorce, health issues, a decrease in the value of the home or other unfortunate circumstances. Clearly it is unfair to tax people on phantom income when they most likely have no cash with which to pay the tax.”
In other news, another bill has been sent to the House Judiciary Committee that would revise the bankruptcy code to allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after the filing of bankruptcy.
— REALTOR® Magazine Online
Good news is the 1099’s will not be sent out from lenders on short sale or at least temporarily.
Sheila
Yes, the lenders will often submit a 1099 for the homeowner for the balance that was discounted in the short sale, but not always.
For example: If the debt was for $100k and the short sale was accepted at $60k, then the $40k difference is deemed as taxable income to the homeowner.
Each short sale I conduct I specifically state in my offer letter that the homeowner is not to be pursued or otherwise held liable for the discounted balance. Almost every time it is accepted that way and specifically stated on the payoff letter, but again, not always.
Very well put…I put that in all my offers too and let them know that if the homeowner is pursued, then I will simply walk away and they can have it. Good Luck!
Thanks for the replies. I like the thought of putting that in an offer.
No deals yet just alot of learning to do!