I have ready numorous things regarding tax Consequences to the owner. I have read this in books and on the internet. If i understand correctly; when you do a shortsale, the owner of the home has to declare the difference between what is owed on the loand and the price you pay as income. So if the loan balance is 100,000, and the bank accepts 70,000, then the owner has to pay the taxes on the 30,000. I believe the lender sends them a 1099.
I have asked around to other local investors who have done numorous short sales and none of them seemed to think it was a big deal and didn’t know much about it. Has anyone else had this come back and bight them? I would hate to have a law suit brought against me when the owner recieves a 1099 and has to pay all these taxes. How do you handle this? do you tell the owner this could happen? or just not tell them? has anyone had this happen? i don’t want to screw anyone into paying a bunch of taxes.
I have to say that as a distressed homeowner going through a short sale right now, I would be very p****d if my investor knew of tax consequences and didn’t tell me. I have been doing a lot of reading on this myself, and so far, I understand that you can work with a good accountant who will help lessen the blow come tax season. In all honesty, I’m so desperate to get out of my house that I can’t think that far ahead, so I’m not too worried. “Yet!” I’ll cross that bridge later.
I’ll be interested to see responses to the OP’s thread.
Always disclose to the HO that the Lender has a right to file a deficiency judgement or a 1099 for the short fall amount.
I always submit my short sale packages to the Lenders with the cover letter stating that my offer is contingent upon the Lender waiving their right to file a deficiency judgement. If the Lender refuses but still is interested in working with you on the short sale, inform the HO of the situation and have them decide if they want to persue the short sale. Explain to them that if the house goes to the foreclosure sale, the lender has the right to file the deficiency judgement anyways. At least if the short sale is approved, the deficiency amount will be far less than the entire amount if the house does not sell at the auction.
The Banks know that they do not have a very solid chance of recovering any money from the HO through a deficiency judgement. The HO does not have any money, which is most likely the reason that they are in foreclosure anyways.
The banks will waive their right to file the lawsuit or 1099 and it never hurts to ask!
Please correct the following facts regarding this subject:
[]Lender has a right to file a deficiency judgement after a short sale (or other circumstances when the balance is NOT paid in full).[]If lender does not pursue lawsuit for the difference, then lender is obligated by law to disclose to IRS that a loan or part of the loan was forgiven.[*]Such forgiveness will be indicated on 1099 and a copy will be sent to IRS since loan forgiveness is considered as “income” to a mortgagee and, as such, is subject to income tax.
What Can Investor Do About It:
Firstly, Inform homeowner of the facts. Secondly, as suggested, ask the bank to waive their right to file a deficiency judgement. Is there a form / letter / language that is standard for this?
Assuming that second point above is correct, is there anything that can be done about it?
Perhaps negotiate with IRS on thier behalf? Offer to prepare (for free) homeowner’s tax returns with CPA that understands the situation? The idea here is that I (and I hope the rest of investors) do not want to tell homeowner that everything is all set and a year later hear from them that they suddenly owe 10K in taxes or be served with a lawsuit.
I agree: if lender forecloses and auctions it off for less than what is owed, then the lender can still go after the homeowner for the difference. But, if the property is not sold at auction and the bank takes it, then doesn’t the bank need to sell at a loss in order to go after the homeowner for the deficiency?
Sorry for the confusing structure – just trying to get a handle on this specific aspect. Thanks in advance for any advice.
Seeing how I have not yet experienced an “end of year” with my short sales experience, I don’t feel qualified enough to answer your 1099 question… (But, if the property is not sold at auction and the bank takes it, then doesn’t the bank need to sell at a loss in order to go after the homeowner for the deficiency?)
I would think that if a bank takes a property back as an REO and doesn’t sell it for a long period of time, they will want to claim it as a loss. However, I have been told than many times the 1099 never goes out, as an oversight.
Please, if you are more experienced SS Investor, that knows at what point after the courthouse sale and REO status, the 1099 is issued, feel free to add your input.
One thing is for sure… always be honest with the HO even if the truth jeopordizes your chance of landing the deal.
To answer your question… I am not aware of any standard form to ask the Lender to waive their right to filing a deficiency judgement. I state it on the cover sheet (summary page) of my short sale package, as a contingency to completing the deal. It’s rarely questioned and sometimes overlooked until the negotiations are near an end. Obviously, I try to get through the negotiation process first and then remind them of this requirement. If the Lender has a problem with it, then I present the situation to the Home Owner. Ususally, this is days before the foreclosure sale and the the HO agrees to complete the short sale, knowing that it is still their best option and that I tried my best to get the deficiency judgement waived.
Thanks Guys…I have heard all of the above as well. If a HO is insolvent, meaning they own NOTHING…then the bank will usually waive the deficiency judgment. I am of course having my HO check with their accountant but they dont know anything either sometimes.