IRS Tax Laws on Short Sales

[Moe Bedard]

In order to avoid home foreclosures, which can be complicated and lengthy, banks often engage in term negotiations with borrowers. A short sale occurs when the mortgage lender (the "mortgagees") agrees to alter the original terms of the loan by lowering the outstanding balance of the debt. Such forgiveness often takes place in cases of a financial deficiency, or when shifts in the real estate market result in a negative net equity on the part of the borrower (the "mortgagor"). In particular, under a short sale the home owner is allowed to sell their home for less than their outstanding debt and give the proceeds to the lender in return for forgiveness of the loan.

Generally, a loan officer at the bank will negotiate new loan terms upon the request of the lender. While the bank is not obligated to negotiate with the lender, there are several advantages for both parties when the loan would otherwise result in a foreclosure. If you are considering a short sale, however, there are a number of tax implications to factor into your decision. Where the parties are able to reach a short sale agreement, the forgiven portion of the loan may still be taxed as income on the part of the borrower. This article aims to provide guidance on the most recent changes in the IRS tax structure as its affects property short sales.

In general, the IRS tax code specifies that a borrower must file a 1099C
Cancellation of Debt form when the forgiven amount equals or exceeds $600. Traditionally, the IRS has treated this amount as fully taxable income on the part of the borrower. The 2007 Mortgage Forgiveness Debt Relief Act (Public Law 110-142, HR 3648), however, amended the tax laws to allow borrowers negotiating the loan on their primary residence to avoid having to declare this debt as income (limited to debts of $2 million or less.) Importantly, this forgiveness stipulation does not apply to rental properties or other non-primary residences that a lender may hold. Previously, only a personal bankruptcy filing could prevent the forgiven debt from being treated as taxable income. With the Debt Relief Act effectively provides an amendment to the original 1986 Internal Revenue Code which allows selective exclusion of forgiven debt from taxable gross income.

Under the conditions of Form 1099-C, there are special circumstances that may affect whether canceled debt is treated as taxable income. In cases where the borrower declares bankruptcy, the debts are fully discharged although the declaration may have broader adverse effects in terms of other financial and tax obligations. Additionally, under certain circumstances the debt is not taxable if a professional accountant has determined that the value of the debt is greater than the appraised, fair market value of the asset in question.

Farm debt is also treated differently according to the law, which is signified by direct farm debt for those who earn over half their gross income directly from farming. If you are seeking to execute a short sale on a residence other than your primary home, but which served as a secondary residence for you personally during the last five years, the Relief Act also provides a graduated scale of gross income reductions.

Depending on the time you physically lived in the home in question, you may be able to deduct a portion of the forgiven amount. It is important to consult with a professional tax attorney or accountant, however, when considering the implications of the law upon your individual situation.

[RefusetobeStressed]

Moe or ANYBODY

I met with a real estate agent today to list my home for a Short Sale. I was told I would have to pay the 1% which is $3,795.00 because she will be selling the house for $379,500 although I owe over $800,000. Is this the norm? She stated I will get this money back at closing when the house sell. My husband was at work when I met with her today so he has not yet signed the documents. We suppose to meet with her on Monday.

Refuse

[faith]

Originally Posted by RefusetobeStressed

Moe or ANYBODY

I met with a real estate agent today to list my home for a Short Sale. I was told I would have to pay the 1% which is $3,795.00 because she will be selling the house for $379,500 although I owe over $800,000. Is this the norm? She stated I will get this money back at closing when the house sell. My husband was at work when I met with her today so he has not yet signed the documents. We suppose to meet with her on Monday.

Refuse

Refuse,
Don't pay her a dime. Your lender pays your agent's commission. I sold my house via Short Sale and I've found a wonderful agent through bbb search. He listed my house in all the MLS listings and brought in 4 buyers in about 1 week. My first agent was not able to sell the house. To make the story short, after 2 listings, 7 buyers backed out, 9 months Countrywide Home Loans approved the Short Sale and I've waited 1 month and 10 days to close the escrow.

My agent negotiated to Countrywide Home Loans negotiator that there will be no costs to me, my buyer's agent made an extra $8 to the selling price of $290k with a condition to apply the $8 to the buyer's closing costs. CW paid my agent 5% commission.

Some agent's are trying to make an extra buck up front because they know that it takes time to do Short Sale. Your lender will not return to you the money you have paid your agent up front, no that's not how Short Sale works. You are doing Short Sale because you are in financial hardship and you cannot afford to make payments and if you are paying your agent up front the lender may stop and think, hmnnn.

That is a big red flag, DO NOT HIRE THIS AGENT. Get someone else that will only accept Short Sale after the escrow close. Even in regular home selling,
I've sold my house in 2005, my agent did not ask me anything, I've paid him
when the escrow closed.

I hope this helps and God bless.


Faith

[RefusetobeStressed]

Faith,

She faxed me the contract this afternoon so my husband could sign and as I stated earlier will meet with her on Monday to give the contact back to her. I think I did something stupid. I gave her a check for the $3795.00 but when I gave it to her she told me to get a money order for that amount but do not fill it out. She is going to give me the check back. I asked her why and she stated her office determines how the money is distributed. I thought that was odd. I have the listing agreement open now and it seems she is a broker working for a real estate company and I don't think I should list the name of that office. Should I cancel the check?

Refuse

[faith]

P.S.

You can check bbb search about the name of the company this agent associated with you will be suprised to know how bbb search can help you in making your decision in hiring agents, workers, companies. etc. Some of the real estate brokers and company's are rated F. This company that is rated F is one of the largest real estate in Riverside. Be careful, don't just hire someone, check for references, there's a lot of CROOKS there.
You can check the prices in your area check realtors.com or zillow.com, put your zip code. Once you find out the selling price, then you have to beat that selling price by lowering your price to attract a buyer. For example,
the selling price is $379k you have to lower that amount to $370k to attract a buyer.

A good real estate agent who has expertise in doing Short Sale knows what to do. You have to interview your agent and ask if he knows Short Sale if not, say thank you for your time. My agent made a flyer with a note stating Short Sale for $290k Pending Approval of the Lender. Once your agent get a buyer, he will then represent your buyers agent, and the Short Sale package to your lender. You will give a letter authorizing your agent to talk to your negotiator. Your negotiator will order a BPO or Broker Price Opinion and then your agent and your negotiator will negotiate back and forth. From what I know, the lender will accept an offer of 90% of the fair market value, say the BPO was appraised at $350k, 90% of that is $315k. Note that without a buyer, no short sale.

You have to have patience, strong and persistent to have a successful short sale.

God bless you and take care.

Faith

[faith]

Originally Posted by RefusetobeStressed

Faith,

She faxed me the contract this afternoon so my husband could sign and as I stated earlier will meet with her on Monday to give the contact back to her. I think I did something stupid. I gave her a check for the $3795.00 but when I gave it to her she told me to get a money order for that amount but do not fill it out. She is going to give me the check back. I asked her why and she stated her office determines how the money is distributed. I thought that was odd. I have the listing agreement open now and it seems she is a broker working for a real estate company and I don't think I should list the name of that office. Should I cancel the check?

Refuse

Since your husband has not sign the contract, call her and just tell her that your husband does not want to sign the contract, and you want the check back, that you have put a stop payment on the check. You practice what to say to her, say a prayer first that God will help you what to say. And if she refused, then tell her that you will file a report at NAR(National Association of Realtors), see what her response, agents doesn't want to have complaints about them, because NAR could take their license back.

That is odd, after you gave her a check, then she wants you to buy her a money order for the same amount, but wait don't put anything in it because the broker will determine how much each will get? I see ripped off when I hear one.

If you are sitting in your computer can you do me a favor and go to your browser and type bbb search, once you type the bbb search click on that and it will give you a page where you can type the name of the company and their address, zip code and then will give you a report for that company. Even the name of that broker or agent, maybe you can find something about this company.

Don't worry about the check, you can always put a stop on it. Let's just hope she will return it, If not repeat to her about complaining to NAR.

And by the way when you sign a contract with a real estate agent, you don't give your SSN first, tell them that you will give your SSN once the escrow closed. Because you really don't know this people, you have to protect what you have. If they argue with you, that's a red flag, then say I don't feel comfortable giving my SSN, I rather give it to the title company when the escrow closed. That's what I told my agent and he said, I don't need it anyway, my title company needs it when escrow closed. That's when I knew that I was safe with him. And don't sign an exclusive listing because if you do you are giving them the right to sue you.



My thoughts and prayers are with you and husband.
God's hand is upon you and husband and family.

Peace be with you.


Faith

[RefusetobeStressed]

Ok faith. I will go and type in the bbb for a search and put the info in. I just went into my bank account and put a stop on that check. I will return.

I should have know better it's just that I am so desperate and want this nightmare over with.

[RefusetobeStressed]

Faith,

I'm in search.bbb.org/results. There are 8 listings for this realty but not one has the address that is on the forms I signed today. There are three for VA but they all have difference addresses and phone numbers and those three say "This is not a BBB accredited business".

Also on the 2nd page of the list agreement it states "DISCLOSURE OF BROKERAGE RELATIONSHIP" THIS IS NOT A CONTRACT; IT DOES NOTCREATE AN OBLIGATION".

REFUSE

[faith]

Originally Posted by RefusetobeStressed

Faith,

I'm in search.bbb.org/results. There are 8 listings for this realty but not one has the address that is on the forms I signed today. There are three for VA but they all have difference addresses and phone numbers and those three say "This is not a BBB accredited business".

Also on the 2nd page of the list agreement it states "DISCLOSURE OF BROKERAGE RELATIONSHIP" THIS IS NOT A CONTRACT; IT DOES NOTCREATE AN OBLIGATION".

REFUSE

Refuse,
You can double check bbb again and just put the name of the company and if you don't see the name of the one that you saw today,that means they are not a member of BBB and the ones in VA they are not a member either but someone called BBB to check that company that's why they are showing in their listings. So if you can not find them don't use them.

I've checked my Listing Agreement and Contract with my agent and I have 28 pages that he faxed to me that I have signed and faxed back to him because we're 70 miles away from him. My listing agreement shows same Disclosure Real Estate Agency Relationship but none says THIS IS NOT A CONTRACT; IT DOES NOT CREATE AN OBLIGATION.

Actually my agent has Century 21 Seller Service Pledge stating in detail 21 things they will do to make sure that my house is sold, client acknowledgement, listing agreement, civil codes of real estate,seller's affidavit and property disclosures, the fees, the price, when the listing expired, but none says THIS IS NOT A CONTRACT, IT DOES NOT CREATE AN OBLIGATION. This statement alone will give me a RED Flag.

I know you want to do the right thing and you want to sell the house as soon as possible. But please be careful hiring real estate agents most especially giving money for the services that he has not yet earned. Even a new hire employee has to work 3 weeks before he gets paid a 1 week check.

The first thing you do you already did by putting a stop on the cancel check. Check bbb search for real estate agents near you, then call her Monday, if she doesn't talk to you, talk to her Manager, tell her that you want your check back and so on. I hope and pray that everything will work out for your good and your husband.

God bless.


Faith

[RefusetobeStressed]

Thanks so much faith. I am on Century21 wesbsite now. I guess I need to stop acting so quickly. Once again thanks

[faith]

Originally Posted by RefusetobeStressed

Thanks so much faith. I am on Century21 wesbsite now. I guess I need to stop acting so quickly. Once again thanks

Thanks to Moe and *** and Professor Shays and Andrew and Loansafe.org

Sometimes, all you need is to stop and think and ask your husband's opinion because two heads are better than one, three is encouraging and more will make sense.

It also helps when you look Up, and close your eyes and ask our Maker to help you solve your problem, because there is no problem too big God can not solve it, if He carry the weight of the world, I know God can carry yours and mine too.

I feel your pain. God loves you and God bless you and your husband too.

Faith

[RefusetobeStressed]

Faith, yes thanks to all here for just listening and giving good advice. I know God loves me and I do pray and thank him everyday for how he has blessed me and my husband. My husband tells me all the time how I react to quickly and now I know he is right :-)

In my heart I feel God is trying to tell me to let this be because he has a better plan for me. I just feel so attached to this house and I don't know why. I am not materialistic at all so I don't understand why it is so hard for me to let it go................

[Moe Bedard]

Refuse,

Please find an agent that is not charging you 1% up front fee, that just isn't right, in a short sale the seller doesn't pay anything, the seller's lender takes care of the commision...........all that tells me about this agent is that they are lazy and are not going to work very hard for you because whether they close the deal or not they just made a quick $3795 off of you. Faith is right, the lender will pay an amount for both the buyer's agent and your agent to split between them.

[RefusetobeStressed]

***,

I already canceled the check. My husband is going to call her and settle it. Now I know...no money upfront...no money at all...........I just can't believe she would do that to me......

Once again thanks

[faith]

Originally Posted by RefusetobeStressed

Faith, yes thanks to all here for just listening and giving good advice. I know God loves me and I do pray and thank him everyday for how he has blessed me and my husband. My husband tells me all the time how I react to quickly and now I know he is right :-)

In my heart I feel God is trying to tell me to let this be because he has a better plan for me. I just feel so attached to this house and I don't know why. I am not materialistic at all so I don't understand why it is so hard for me to let it go................

Refuse,
It's okay to be attached to your house, it's a human nature. Besides we as women are created to be very emotional. Men has emotions too but not as much as we women do. After work men goes home, don't say hi hello to his wife, take off his shoes, turn on tv, while reading the newspapers. Then here is his wife, worked hard too, just came to work and didn't even take off her shoes, goes to the freezer and look what she can cook for dinner while her mind was why didn't even the husband say hi to her or give her a hug or even ask her how's your day. She cooked the dinner, they ate, they went to bed, the husband was snoring, while the wife is still fuming unable to sleep, why because he didn't hug her or say hi to her. Is that normal, of course it is, we are created that way. But men no, they are macho, they don't cry, they don't hurt, but wait they do have emotions, they do cry and they are not macho, they just don't show it.

I was attached to my house too, I bugged Moe, ***, Professor Shays and Andrew to death asking, worrying, crying, sometimes laughing, because these guys made me laughed too. But reality sink in, can I afford the payments?
No, can I get a job after this uninsured driver hit me that caused me to be disabled and lose my job, No, I am consider senior now, I can get discount at all restaurants and senior coffee at donalds.

I've realized that what is more important is my life and not this house, what is more important is to have peace of mind. And also I have noticed that the value of homes are going down fast and I have to act fast to sell my house. Thanked God he helped me and my house was sold via Short Sale, Countrywide Home Loans paid 5% commission to my agent, no costs to me, the buyers paid an
extra $8k to pay for their closing costs.

I really thanked God for this site, Words can not expressed how I am grateful to Moe, ***, Professor Shays and Andrew. They just don't know how much help they have given to everyone in this site. I always thank God for them and pray for them too.

So please don't feel bad, it's ok to be attached to the house, it's like a grieving process, there's always a start and an end, and Now is the time to be detached from your house. Whatever your decisions will be I hope God will help you make the right decisions always and give you favor from your agent, your lender, your negotiator, your buyer and your buyer's agent and the buyer;s bank. Let's claim by the grace of God and the help of God that this house is now sold and all the balance owed is forgiven both by lenders and the IRS.

Thanks and God bless and take care.


Sincerely,
Faith

[RefusetobeStressed]

THANK YOU FAITH...with tears rolling down my face...I do know this will pass and this ache will disappear..............It's 3:17 am Sunday morning and I'm still up while my husband lay in the other room snoring :-). I know he is aching to but like you said they are macho. I know he wants me to be happy but not at the expense of this home. I guess that loan modification we got in February was just a bandage and the soar is just about to heal and then the bandage will be removed.

[faith]

Originally Posted by RefusetobeStressed

THANK YOU FAITH...with tears rolling down my face...I do know this will pass and this ache will disappear..............It's 3:17 am Sunday morning and I'm still up while my husband lay in the other room snoring :-). I know he is aching to but like you said they are macho. I know he wants me to be happy but not at the expense of this home. I guess that loan modification we got in February was just a bandage and the soar is just about to heal and then the bandage will be removed.

Refuse,
Can I pray for you now? I hope Moe and *** and Professor Shays and Andrew and others won't mind because this is what I've lead to do, We are only a distant away but God is just there with you and me. There is no distance in prayer and where two or three are gathered in his name he will be there. Father God in the Name of your Son Jesus, I pray that you will comfort refuse, you know her real name and make her sure that everything will be alright. I pray that you searched our hearts and forgive us if you find something that is not right in your eyes. I pray as she calls that agent on Monday that you will intervene that the check will be returned no questions ask and that you will give her the right words to say to that agent, favor her Lord. This is very difficult time for her and up to this time as it is pass 3:17 am in her place, the time does not constraint you because you own the time. Bless her and her husband financially and with favor and wisdom, give her the courage to say no when it needed to say no, strengthen her in times of storm as you quiet and calm the storms 2000 years ago with your disciples. Please give her rest and help her to sleep and relax. May you open a door of opportunity for her to find the right agent who knows how to do short sale in her area without asking for any money and that the lender will accept the short sale, favor her with the right agent, negotiator, buyer and everything that she needed in order that the short sale will be successful. Lord have mercy on her and others who are struggling in this present economy, may you help all of them find the right solutions for those who wants loan modifications I pray for lender's approval, for those who wants to do Short Sale I pray for lender's approval and right negotiators, agents and buyers too. Please do something Lord, without your interception and without your help we cannot do anything. Everything seems to hard for us but we know all things are possible with you and there is nothing to hard for you. I pray also for extra blessings for Moe whom you have used to open this site to help struggling homeowners like us, bless also ***, Professor Shays and Andrews who gave all they have to give their knowledge, insights and tips. Bless Moe, bless ***, bless Professor Shays and bless Andrew and others who gave their best to help all of us, bless this site and most of all bless all these struggling homeowners like refuse, tyler, gery, kimberly, gerry, I can't name them all, you know them all, please Lord have mercy on all of them. We need your help, quiet their hearts and mind, give them all peace and protect them all and provide all their needs. Thank you Lord, in your name I pray.

With a humble heart,
Faith

[RefusetobeStressed]

Amen...thanks Faith

[AmericanNightmare]

So if my loan is non-recourse (CA) and I do a short-sale, is the difference taxable?

[Moe Bedard]

you may want to go take a look at this section of the forum because I am sure that this question has most likely been asked and answered there.....
Deed in Lieu of Foreclosure - Do You Need Help to Walk Away? - Loan Modification Forum - Loan Safe

[sheila1]

Faith you are wonderful. U are indeed blessed. When trouble comes we often forget to trully turn it over to God. The day a friend asked me to pray before calling CW was the day I got the best answer since dec, 2008 to date. This month makes it 90 days i will be in default. I'm yet to send the hardship letter or expense breakdown. It's as if I have clay in my head. I can't seem to think. I'll probably be here and one day they'll foreclose. I don't mind if they foreclose cos my neighbourhood is not really child friendly. My kids just said in conversation with my neighbours kid that they'll liketo move cos everyone keeps to themselves and its just too quiet. The other kid agreed. I really have nothing to loose now. For 3/4 the amount we pay for our townhouse we could rent a single family in the gated community next door.

[amiesheikh]

Originally Posted by Moe Bedard

Additionally, under certain circumstances the debt is not taxable if a professional accountant has determined that the value of the debt is greater than the appraised, fair market value of the asset in question.

Can you calrify this Moe? For example I did a short sale on an investment property. Loan amount was around $325K (first and second wells fargo) and we sold it for $199K (market value) back in January. Come tax time if my accountant can prove that the house was only truly worth $199K at the time of settlement then will I be exempt from the so called "income" I can be taxed on? Do we need an appraisal from that time to be able to do this?