my first (assisted)short sale - taxes on shortsale

so I find my first short sale.
It was listed in the MLS and therefore it comes with MY agent and the listing agent.

Here are some facts and I would love to hear your opinions, because this is nothing like what I read about in the home study courses.

House: 2001 - 2500sqf. needs some cosmetic work so far, owner already moved out, fairly high demand rental AND purchase area, good neighborhood, the house is listed for 249K, the borrowers owe probably about 265K and are probably 2 payments behind. The bank apparently said: “just keep it listed and we’ll see what happens.”

Comps on the low end are about 265K; house is listed right now for 249K (for 10days before it was listed for 259K for 45 days)-the area because it is across an Army Post is easy rentable and actually sellable but you have to get into the summer rotation and have a house that doesn’t need all that repair first… The loan is conventional.

The bank hasn’t taken any steps yet, no hardship package has been sent in. No BPO done.

The agent said:

  • If the offer is too low the owners won’t even pass it on to the bank.
  • The sellers cant allow the house to sell too low because they will have to pay taxes on
    what ever the difference on what the bank is settling for and the loan amount. The IRS treats it like a gain…

those two things about pulled the rug from under me and I am not sure how to proceed. I looked around to find some info on how the taxes are handled but found nothing solid…

I would so appreciate your comments.THanks

Will the seller’s refuse an offer they think is too low? Possibly. Perhaps the sellers have already received guidelines from their lender with respect to the minimum acceptable price the bank will approve in a short sale. Maybe that amount is 85% of the loan balance. If the sellers also have to pay a real estate sales commission, then the price they can accept may need to be higher to cover the sales commission. We don’t know these sellers and don’t know what they may already know, so, yes, this could be true.

Your second question is partly true. Up until earlier this year, the amount of mortgage debt that was forgiven was treated by the IRS as ordinary income (not gain) and taxed accordingly. Mortgage cancellation relief legislation was just passed which created a three year moratorium on taxing debt forgiveness. For the next three years, forgiven mortgage debt will be tax free.

Short sales are not as easy as some gurus would have you think. Remember, don’t chase the deal for the sake of getting your 1st short sale. The bank and the owners are the only ones in some jeporady, not you. Being only 2 payments behind usually won’t even jump start the pre-foreclosure process. The closer the owners/sellers get to the point of formal pre-foreclosure/foreclosure the more closely you will be taken seriously. Go thru the Short Sale process and run the numbers before you make an offer. Remember real estate investing is a numbers game - purely objective. Good luck!

Hi, thank you, thank you for all your advice. That really helps so much. I did find more information about the Mortgage Cancellation Tax, I feel so much better, now that I know the seller would not have to pay this.
Not quite sure how I will continue from here since it actually is not a short sale yet. But thank you so much for your guidance!