I’ve got 1 on the line that has this concern & I told him I’d get an answer and get back with him:
-If a lender agrees to do a short sale with a borrower, does the borrower have to pay tax on the difference?
The lender used to be required to report the deficiency as income to the IRS, but from what I understand, they do not anymore. I’m sure one of the pro’s will chime in.
IF the lender issues the homeowner a 1099 or 1099-C it is essentially reporting its loss from the ss to the IRS and homeowner must report the 1099 as income on their return. For 2007 thru 2009, any 1099’s issued to homeowners by lenders due to debt cancellation from a short sale or foreclosure is not taxable income. (Although you still have to report the 1099 if you get one.) Make sure your borrower seeks professional tax help!
Here is the info from the IRS website. It’s helpful to have the borrower print it out and keep it with their files to show a CPA or tax preparer when the time comes.
http://www.irs.gov/newsroom/article/0,,id=174034,00.html
[i]Update Feb. 4, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.
This provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home. More information on claiming this exclusion will be available soon.[/i]
Hi all,
Trying to help family member. Purchased a bigger house for growing family. Put 1st house on market, which had first arount $180, plus a home equity loan. Then the market bubble burst. So now they could not sell, have payments over $2K, renters @ $1300, dipping into the home equity just to make up dif. They have not gone into bankruptcy–yet but house now only worth about $140K but they owe about 220K and growing. Don’t think they will qual for loan forgiveness because they put renters in there because would not sell. You think a SS is even pos if they have not lost it yet, just keeps getting further into debt?? :banghead :flush
Yes, you can start the SS process while they still can pay the mortgage. If successful, they can get rid of the property and salvage their credit.
The key is to prove thier hardship. If they will indeed run out of funds to conintue paying, then they should show that to the lender as soon as possible.
Email me and I’ll send you the forms you need to have them fill out. In the meantime, I recommend you find a good, experienced short sale realtor in your area.