short sales

What happens to the seller when the bank goes after them for the rest of the money owed after the discount? Who pays the tax on the difference?


Generally, the bank does not go after them for the difference. They take it as a loss. I have heard of cases where the bank takes the difference as an unsecured debt, but I would never agree to that if I were the seller.

If the bank officially charges off the difference, the bank will send a Form 1099 to the seller for the charged-off amount so that the seller must claim it as taxable income. This is an unpleasant surprise to most sellers.

The good news is that if you can prove that you were insolvent at the time the debt was charged off, you don’t have to treat it as taxable income. And given that your financial situation was so bad that someone charged off a debt, proving insolvency should not be a problem. In summation, you just have to show the IRS that you have a negative net worth and no liquidity.

I really appreciate this info. My other question is should I inform the seller of their obligation to the IRS?

Whether or not a 1099 is issued, the relief of the debt by the owner is considered income by the IRS and is a “taxable event”…there have been many discussions of this in this forum and the income tax forum…


Yes, but in the real world, if there’s no 1099, the seller will not think to claim it. It’s only when the 1099 comes in the mail that the seller, who probably didn’t know the difference was taxable, says, “What the ____!?”

Having said that, insolvency will make the amount non-taxable. Other things can make it not taxable, too:

I not only let the seller know, I have them sign a disclosure as well. Don’t over promise, and don’t hide facts from the seller to be on the safe side. Their options are clear, lose the house and have foreclosure on their record or take the hit.

fadiz: where can I get a copy of the disclosure?

I can send you a copy. I can’t recall which course I got it from, I will have to track its source down.


His e-mail address is in his profile…


So, let’s say I owe $850k and i sold it for $750k, bank loses $100k plus w/ the property tax that needs to be paid. How much will be taxable???
I’m new at this and looking for a buyer on my short sale.

Help from Vallejo, Ca

Hello All,

I am new to this forum and wanting to know where to gain the skill of dealing with banks/loan officers to negotiate a short sale. I understand it’s an art and if you don’t know the right lingo and how to navigate these waters that you’ll get nowhere. Any suggestions? Please, I’ve had my fill of seminars unless it is rock solid, guaranteed to produce results.

All of it…plus any capital gains that you may have on the $750K…