Can some one confirm the following:
Yes, but my understanding is that if they lived there for at least 2 years and it’s under $250k, then they don’t have to pay taxes. It’s considered their capital gains exemption.
That’s only on profit after a sale. The lender will probably file a 1099 to the homeowner for the deficiency, which would be reported as income, and taxes would be paid on that.
I’d like to know what scenario do your responses fall under. The reason is that I met with the Home owner for the 2nd time so they can sign all the paperwork for a short sale. They told me that someone had advised them that a short sale was meaningless for them. They were told there was zero benefit if they did a short sale; they might be paying the deficiency balance to lender JUST LIKE A FORCLOSURE and pay taxes on deficiency balance JUST LIKE A FORECLOSURE.
Does any one know if this is true? Please clarify.
That is probably state specific. You need to lookup the law for your state or talk to an attorney.
No it isn’t state specific.
You negotiate the deficiency judgement out with the short sale.
The lender will then issue a 1099, by law, for the IRS
When you file your next taxes, you’ll need to fill out a form to have the income forgiven due to hardship. (You lost your house, how much harder does it get?)
The form number to fill out would appear to be in my signature line.
This question is getting old.
:flush
JDS,
I appreciate your answer, but you still HAVE NOT answered my question fully.
I don’t think the question is getting old, I think I’m getting old.
JDS, you clarify the fact that on short sales there’s away around paying taxes.
I think we all got that even from previous posts.
HERE IS THE QUESTION:
when a house is foreclosed upon, say either it’s sold at auction or sold as REO, what happens to that deficiency balance? can a bank go after you for deficiency balance, same as shortsale (I think answer is yes); on a forclosure, you can also fill out the form to not pay taxes, same as in shortsale (I think the answer is yes).
so when someone says, it’s pointless to do a shortsale; you are affected the same way as a foreclosure. The only advantage is in the credit.
foreclosure, the credit is blemished for 7 years or so.
in shortsale, the credit is blemished with a settlement, perhaps?
That’s the only difference! my conclusion.
does the lender consider the short sale a “release of lien” meaning the lien still exists (and the borrower is still responsible for the difference)but it’s no longer attached to the property?
or a “satisfaction of mortgage” which means the debt no longer exists?
forgive me if the terms i used are not precisely accurate as i’m not an attorney but there is a difference between those two scenarios and the lender does not always issue a 1099. in fact in my experience they normally don’t…but they can so you better find out what they intend to do.
If the bank forecloses and then can’t sell the property for the full amount, they will issue a deficiency judgement for the difference.
The foreclosure shows up on your credit, and so does the deficiency. And you have a collection agency hounding you for the money.
If you short sale, you negotiate the deficiency judgement away, take the 1099, file the 982, and the account shows as ‘paid deficient’ on your credit, which isn’t as bad as ‘foreclosed’, and you don’t owe anyone a cent.
Again, my terminology might not be correct.
The advantage of the short sale is making a clean break.
On a short sale, the forgiven debt (deficient balance) is treated as income by the IRS, so you have to use the 982 to have the tax forgiven by them.
On a foreclosure, the deficient balance is still a debt, so the IRS has no jurisdiction over it for the purposes of calculating your income.
This is not legal or financial advice, consult a professional, yada yada
Thank you for making the distinction between the different effects for each scenario.
It really did clarify lots of things.
great answer jds, I was getting confused before as well.