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New Short Sale Guidelines Encourage Sweeping Changes to Short Sale Process

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Bobby are all short sale loses 1099'ed to the former owner? Lets say i walk on my home i bought 3 years ago and the bank ends of short selling it for a total 200k lose. Will they automatically send me a 200k 1099? if so is there anyway the homeowner can write off the 200k lose against the income to negate any taxes due the irs? i find it hard to believe when a homeowner leaves a $3 mil home and it sells for $2 mil he's paying tax on a $1 mil 1099. there must be away around it. i know it only applies to a second home.

So far no set pattern and each bank is different. Many banks are now starting to stand strong with sellers that have means to pay. The bank doe not have to send sellers a 1099. If they write it down and do not come after you at all you better check with your Accountant because my understanding is it can still be considered income whether the bank sends you anything. The seller could in fact end up paying taxes on the million left on the table. This is where it could get weird over the next few years. Owing the bank is one thing but owing Uncle Sam is another. They WILL get theirs.
 
When homeowners attempt to sell their house for less than the total amount they owe on it, certain tax liabilities may be triggered. This is one of the reasons that every foreclosure victim should carefully consider whether selling their house short is the right decision for them, and what other options may be available. The danger of getting an income statement on an IRS 1099 form at the end of the year for thousands of dollars may result in a higher tax liability than the homeowners originally anticipated.

Essentially, being 1099'd means that the homeowners, after the short sale has been used successfully to stop foreclosure, will be responsible for paying the taxes on the amount of debt that the bank forgives in order for them to proceed at all with the sale. Taxes would only have to be paid on the amount forgiven, not on the contract price, final payoff amount, or foreclosure judgment.

For example, if the foreclosure victims owe $150,000 on the mortgage, but the bank accepts $100,000 as their final payoff in order to facilitate the short sale, the difference of $50,000 is the amount that is counted as "forgiven debt." The IRS considers this $50,000 as if the bank gave the homeowners a gift for that amount, which was immediately used by the owners to pay down their mortgage. Therefore, taxes would be due on the amount given by the bank.

Selling at a Short Sale and the Possibility of Getting a 1099 Income Statement

I had no idea this was the case. My guess is this HAMP thing is largely DOA. Unless the banks's write-off is small, who would take on this kind of tax liability when they have the simple option of wrecking thier credit for seven years and walking away scot free through a foreclosure?
 
So far no set pattern and each bank is different. Many banks are now starting to stand strong with sellers that have means to pay. The bank doe not have to send sellers a 1099. If they write it down and do not come after you at all you better check with your Accountant because my understanding is it can still be considered income whether the bank sends you anything. The seller could in fact end up paying taxes on the million left on the table. This is where it could get weird over the next few years. Owing the bank is one thing but owing Uncle Sam is another. They WILL get theirs.


Which begs the question, if congress really wanted to facilitate short sales, why didn't they create a short-term exclusion for this case?
 
heres something i found. it seems if its a second home no matter what its taxable. but it alos seems if you're in bankruptcy or insolvent its forgiven




A New Law Fixes the Problem

The new Mortgage Debt Forgiveness Relief Act was signed into law by President Bush on December 20, 2007 can help you overcome the homeowner’s objection. This law can eliminate taxes that would often be due from the homeowner in the event of a short sale.

Highlights of the New Law

In order to qualify for the exclusion from tax liability under the new law, the homeowner’s situation must meet several criteria:

1. The debt forgiven must have been used to buy, build or substantially improve the principle residence and must be secured by that residence (not home equity loans or cash-out refinances unless the money was used to fix up the home. If the home equity line or cash from the cash-out refinance was used to fix up the home then debt forgiven on those loans will qualify as non-taxable under this new law);
2. Debt used to refinance may also be eligible for exclusion, but only up to the amount of the old mortgage principle, just before refinance;
3. The property must be the primary residence of the homeowner (no second homes, investment properties, or business property);
4. The homeowner must have: owned the home for at least 2 years; and lived in the home as their main home for at least two years.
5. The maximum amount of the debt is $2,000,000 or $1,000,000 for a married couple filing separate returns;
6. The debt must be forgiven on or before December 31, 2009; and
7. The debt forgiveness must be related to a decline in: the value of the residence or the financial condition of the homeowner.




The Tax Guy by Bill Bischoff (Author Archive)

Taxing Consequences of Short Sales

Sad to say, but it’s not so unusual these days to have mortgage debt that exceeds the current value of your principal residence. While this is not a pretty picture, if you hang onto the property long enough, you have a reasonably good chance of riding out the storm with little or no harm done. On the other hand, if you have to sell now, you face what’s called a short sale — which means selling for a net sales price (after subtracting commissions and other closing costs) that’s less than the outstanding mortgage debt. What are the tax consequences? Keep reading.

Short Sale Tax Basics



This subject is a bit complicated. The easiest way to explain the deal is with some examples.

Tax Gain on Short Sale

Example 1: Say you paid $200,000 years ago for your principal residence that you could now sell for a net sales price of $300,000. Unfortunately, you also have $350,000 of first and second mortgages against the property because you took out a big home equity loan a couple years ago at the top of the market, when the home was worth $500,000. Believe it or not, you’ll have a $100,000 gain for tax purposes if you sell. Why? Because the net sales price exceeds the tax basis of the home: $300,000 sales price - $200,000 basis = $100,000 gain. (Your tax basis basically equals what you paid for the property plus the cost of any improvements made over the years minus any past depreciation write-offs if you rented the property out or used part of it for deductible business purposes.)

While it doesn’t seem very fair that you could have a $100,000 tax gain from a sale that leaves you $50,000 in the red with your mortgage lenders, that’s the way the law reads. Mortgage debts simply don’t enter into the gain-on-sale calculation. Now for the good news: You’ll probably be able to exclude the $100,000 gain for federal income tax purposes thanks to the federal home sale gain exclusion break. If so, you won’t have to report the $100,000 gain on your Form 1040. You may or may not qualify for the same favorable treatment on your state income tax return, because state rules vary.

Tax Loss on Short Sale

Of course, you can also have a short sale where the net sales price is less than your tax basis in the property.

Example 2: Say you paid $415,000 for your principal residence that you could now sell for a net sales price of $300,000. You also have $350,000 of first and second mortgages against the property. For tax purposes, you’ll have a $115,000 loss if you sell because the sales price is lower than your tax basis in the home: $300,000 sales price - $415,000 basis = $115,000 loss. Will the IRS let you claim a write-off for that loss? Nope. You can only claim a federal income tax loss on investment or business property. A loss on a personal residence is considered a nondeductible personal expense. Most states follow the same principle.

What About the Excess Debt?

In both the preceding examples, the mortgage debt exceeded the net sales price by $50,000. If the lender won’t let you off the hook for any of that excess, you’ll have to figure out a way to pay it, and you won’t get any tax break for doing so.

If you’re more fortunate, the lender will forgive some or all of the excess $50,000. To the extent debt is forgiven, you have so-called debt discharge income (DDI). The general rule is that DDI is taxable income. For the year that DDI occurs, the lender should report the amount to you (and to the IRS) on Form 1099-C (Cancellation of Debt). Happily enough, there are some taxpayer-friendly exceptions to the general rule that DDI is taxable, and they can save your bacon. Here they are in a nutshell.

* Up to $2 million of DDI from mortgage debt that was originally taken out to acquire, build, or improve the borrower’s principal residence is tax-free (you must reduce the basis of the residence by the tax-free amount). This super-favorable rule is not available for DDI from debt that was not used to acquire, build, or improve the principal residence — such as DDI from a home equity loan used for other purposes. Rats! But don’t give up hope. One of the other exceptions summarized below may work for you.

* If the borrower is in bankruptcy proceedings when the DDI occurs, the DDI is tax-free.

* If the borrower is insolvent (debts in excess of assets), the DDI is tax-free as long as the borrower is still insolvent after the DDI occurs. If the DDI causes the borrower to become solvent, part of the DDI will be taxable (to the extent it causes solvency). The rest will be tax-free.

* To the extent DDI consists of unpaid mortgage interest that was added to the loan principal and then forgiven, the forgiven interest that could have been deducted (had it been paid) is tax-free.

* If the DDI is from seller-financed mortgage debt owed to the previous owner of the property, it’s tax-free. However, the basis of the property must be reduced by the tax-free DDI amount.

The Last Word

The important thing to understand is that a real estate short sale can potentially result in a taxable gain and/or taxable DDI. Thankfully, you can probably exclude the gain from taxation under the federal home sale gain exclusion deal, and you might be able to exclude some or all of the DDI, too, under the favorable exceptions explained in this article.
 
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1. It changes per transaction in a short sale. Typically the lender pays it in a short sale and then sends the seller a 1099.

2. We are not paid on the "profit" of a sale. We are paid per transaction.

I know realtors are paid a percentage of the sale price...my point was that if the "seller" nets nothing (really, minus nothing) from the sale; someone is responsible for paying the realtor's commission--that would be (as you stated above) the lender. So if the lender knows he'll be saddled with this debt, is it right for the "seller" to contract with a realtor @ a 10% commission?

I believe the lender has every right to stipulate the terms of a short sale with the "homeOwers." If the homeOwers don't like the deal, then they can choose to go into foreclosure or keep paying on their obligation...the same as a realtor has the option of accepting or rejecting the terms when getting involved in the short sale of the home.

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Scooter, If you contracted a plumber to come repair your pipes, and you and the plumber agreed on a rate of $60 per hour, then after the work was done, the plumber's union came in and said that $60 per hour doesn't work. Instead, the price you have to pay is $70 per hour. What would you say?

This example is reversed but that is essentially what happens to us. We have an agreed amount with our customer and a third party comes in after all the work is completed and changes the rate, which costs us more money. It isn't about greed, unless you are talking about the banks being greedy trying to squeeze money out of everyone for their own mistakes of not qualifying the people to whom they loaned money. As passin' thru said, if you don't like the terms of your Realtor, find a discount broker to handle your short sale. You can shop for prices, just like you do with groceries, but if you are looking for quality, you might consider other aspects than just the rates. For example, you might look for experience, professionalism, ethics, knowledge, etc.

Isn't that "third party" the one that is actually paying you though? :idontno:

I understand all the work that goes into a short sale (Bobby sent me all the info months and months ago to help me understand the process better) and I don't have a problem with them making a rule that the banks can't reduce your agreed upon commission. My problem is with SJ's objection to them capping it at 6% - a reasonable rate IMO as the national average is 5.1%.

If the last couple of years taught us anything (and I doubt it), we know that if there WASN'T a cap we'd have people making deals w/ their friends who were agents to try and work the system, knowing the banks couldn't reduce it.

And I don't think you can solely blame the banks for this mess - yes, they obviously bear the brunt of the blame for making the actual loans, but there were alot of other people who helped it happen - among them appraisers, mortgage brokers, and realtors.
 
ok heres a question. If the homeowner could get a 1099 in a short sale why would he even mess with it? why not just make the bank foreclose on you? from what i read a foreclosure triggers no 1099 as its a complete loss to the bank and theres no forgiven loan lose to 1099. ones credit is screwed either way so why would a homeowner screw around with a short sale? so if one was to leave there home and force the bank to kick them out by foreclosing can the bank later short sale it and 1099 you?
 
ok heres a question. If the homeowner could get a 1099 in a short sale why would he even mess with it? why not just make the bank foreclose on you? from what i read a foreclosure triggers no 1099 as its a complete loss to the bank and theres no forgiven loan lose to 1099. ones credit is screwed either way so why would a homeowner screw around with a short sale? so if one was to leave there home and force the bank to kick them out by foreclosing can the bank later short sale it and 1099 you?


I ask myself this one often. On a secondary home loan the bank can come after you for a judgment or you could be held responsible for the difference in the final sale of the home after bank takes ownership. I had a client tell me recently that he was told by his accountant to beware of the tax liability of just simply letting the home go back to the bank. They may not send anything to you but you could still have some liability. Lots of unchartered water here and no consistency in banking rules. I have noticed many of the smaller banks are starting to say no thanks to the short sales. They are choosing to come after the seller in court. BEWARE.
 
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I believe the lender has every right to stipulate the terms of a short sale with the "homeOwers." If the homeOwers don't like the deal, then they can choose to go into foreclosure or keep paying on their obligation...the same as a realtor has the option of accepting or rejecting the terms when getting involved in the short sale of the home.

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You are not getting it. When getting involved in a short sale, ie- taking a listing for a property, the Realtor accepts the terms when the listing contract is executed. The banks are coming back after all the work has been done, and long after the listing terms were accepted, and slashing the amount of the broker's commission. If a Realtor knew in advance what the rate would be, he or she would be able to say no, and not take the listing, but that isn't the case.
 
You are not getting it. When getting involved in a short sale, ie- taking a listing for a property, the Realtor accepts the terms when the listing contract is executed. The banks are coming back after all the work has been done, and long after the listing terms were accepted, and slashing the amount of the broker's commission. If a Realtor knew in advance what the rate would be, he or she would be able to say no, and not take the listing, but that isn't the case.

Just how much are these homeowers giving out for brokers' commissions?

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