|
Find
out more about short sale
In real estate, a short sale is
when a bank or mortgage lender agrees to discount
a loan balance
due to an economic hardship on the part of the mortgagor. The home owner/debtor
sells the mortgaged property for less than the outstanding balance of the loan,
and turns over the proceeds of the sale to the lender in full satisfaction of
the debt. In such
instances, the lender would have the right to approve or disapprove of a
proposed sale.
Extenuating circumstances influence
whether or not banks will discount a loan balance. These circumstances are
usually related to the current real estate market climate and the individual
borrower's financial situation.
A short sale typically is executed to
prevent a home foreclosure. Often a bank will choose
to allow a short sale if they believe that it will result in a smaller
financial loss than foreclosing. For the home owner, the advantages include
avoidance of having a foreclosure on their credit history. Additionally, a
short sale is typically faster and less expensive than a foreclosure.
In short, a short sale is nothing more
than negotiating with lien holders a payoff for less than what they are owed,
or rather a sale of a debt, generally on a piece of real estate, short of the
full debt amount.
Lenders have a department (typically
called a loss mitigation department) which processes potential short sale
transactions. Typically, lenders do not accept short sale offers or requests
for short sales until a Notice of Default has been issued or recorded with the
locality where the property is located. Lenders have to approve of any buyer's
or listing agent's commission in
advance, a primary reason for non-brokered short sales with a specialist or
facilitator to save on the margin. Many of these facilitators
work with a private lending party for their financing, such as a partner or
syndicate.
Lenders have a varying tolerance for
short sales and mitigated losses. The majority of lenders have a pre-determined
criteria for such transactions. Other distressed lenders may allow any
reasonable offer subject to a loss mitigator's approval. "Red tape"
is very common in short sales, similar to REO and HUD properties, requiring
potentially multiple levels of approvals and conditions. Junior liens, such as
second mortgagees, HELOC lenders,
and HOA (special assessment liens), may need to approve of the short sale.
Frequent objectors to short sales include tax liens (income, estate or
corporate franchise tax - as opposed to real property taxes, which have
priority even unrecorded) and mechanic's lien holders. It is possible for
junior lien holders to prevent the short sale.
While it is frequent if not common for
a lender to forgive the balance of the loan in question, it is unlikely that a
lien holder that is not a mortgagee will forgive any of their balance. Further,
it is common for a lender to omit updating the zero balance and settlement
option on the mortgagor's credit report, or even flat refuse to do so "due
to their financial loss."
Recent new about debt relief for home
owner and short sales
The Mortgage Forgiveness Debt Relief Act of 2007
When the lender decides to forgive all or a portion
of a borrower's debt and accept less, the forgiven amount is considered as
income for the borrower and is liable to be taxed.
However, after the signing of The
Mortgage Forgiveness Debt Relief Act of 2007 by President Bush, amendments have
been made to remove such tax liability and allow the borrower and lender to
work freely together to find a common solution that is beneficial to both
parties. This protection is limited to primary residences so consultation with
a tax advisor is necessary ensure that a borrower qualifies.
Reference:
Wikipedia
- Short Sale
The
Mortgage Forgiveness Debt Relief Act of 2007 - White House
More related news...
IR-2007-159, Sept. 17, 2007
WASHINGTON — The Internal Revenue Service unveiled
a special new section today on IRS.gov for people who have lost their homes due
to foreclosure. The IRS also reassured homeowners that although mortgage
workouts and foreclosures can have tax consequences, special relief provisions
can often reduce or eliminate the tax bite for financially strapped borrowers
who lose their homes.
The new section of IRS.gov includes a variety of
information, including a worksheet designed to help borrowers determine whether
any of the foreclosure-related relief provisions apply to them. For those
taxpayers who find they owe additional tax, it also includes a form they can
use to request a payment agreement with the IRS. . In some cases, eligible
taxpayers may qualify to settle their tax debt for less than the full amount
due using an offer-in-compromise.
The IRS urges struggling homeowners to
consider their options carefully before giving up their homes through
foreclosure.
Under the tax law, if the debt wiped out
through foreclosure exceeds the value of the property, the difference is
normally taxable income. But a special rule allows insolvent borrowers
to offset that income to the extent their liabilities exceed their assets.
The IRS cautions that under the law, relief may be
limited or unavailable in some situations where, for example, part or all of a
home was ever used for business or rented out.
Borrowers whose debt is reduced or eliminated
receive a year-end statement (Form 1099-C) from their lender. By law,
this form must show the amount of debt forgiven and the fair market value of
property given up through foreclosure. Though the winning bid at a foreclosure
auction is normally a property’s fair market value, it may not necessarily
reflect its true value in some cases.
The IRS urges borrowers to check the Form 1099-C
carefully. They should notify the lender immediately if any of the information
shown on their form is incorrect. Borrowers should pay particular attention to
the amount of debt forgiven (Box 2) and the value listed for their home (Box
7).
The IRS also reminds lenders of their obligation to
provide accurate information on the Form 1099-C. By law, the lender must
send a copy of this form to the IRS. IRS follow-up contacts with taxpayers
involved in foreclosure are based largely on the information reported on this
form, and whether it conflicts with information provided by the taxpayer on
their federal income tax return.
The IRS normally initiates these follow-up contacts
by sending the borrower a notice. The tax agency urges borrowers with
questions to call the phone number shown on the notice. The IRS also
urges borrowers who wind up owing additional tax and are unable to pay it
in full to use the installment agreement form, normally included with the
notice, to request a payment agreement with the agency.
Questions and Answers on Home
Foreclosure and Debt Cancellation
1. What is Cancellation of Debt?
If you borrow money from a commercial lender and
the lender later cancels or forgives the debt, you may have to include the
cancelled amount in income for tax purposes, depending on the circumstances.
When you borrowed the money you were not required to include the loan proceeds
in income because you had an obligation to repay the lender. When that obligation
is subsequently forgiven, the amount you received as loan proceeds is
reportable as income because you no longer have an obligation to repay the
lender. The lender is usually required to report the amount of the canceled
debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow
$10,000 and default on the loan after paying back $2,000. If the lender is
unable to collect the remaining debt from you, there is a cancellation of debt
of $8,000, which generally is taxable income to you.
2. Is Cancellation of Debt income
always taxable?
Not always. There are some exceptions.
The most common situations when cancellation of debt income is not taxable
involve:
- Bankruptcy:
Debts discharged through bankruptcy are not considered taxable income.
- Insolvency:
If you are insolvent when the debt is cancelled, some or all of the
cancelled debt may not be taxable to you. You are insolvent when your
total debts are more than the fair market value of your total assets.
Insolvency can be fairly complex to determine and the assistance of a tax
professional is recommended if you believe you qualify for this exception.
- Certain
farm debts: If you incurred the debt directly in operation of a farm, more
than half your income from the prior three years was from farming, and the
loan was owed to a person or agency regularly engaged in lending, your
cancelled debt is generally not considered taxable income. The rules
applicable to farmers are complex and the assistance of a tax professional
is recommended if you believe you qualify for this exception.
- Non-recourse
loans: A non-recourse loan is a loan for which the lender’s only remedy in
case of default is to repossess the property being financed or used as
collateral. That is, the lender cannot pursue you personally in case of
default. Forgiveness of a non-recourse loan resulting from a foreclosure
does not result in cancellation of debt income. However, it may result in
other tax consequences, as discussed in Question 3 below.
3. I lost my home through
foreclosure. Are there tax consequences?
There are two possible consequences you must
consider:
- Taxable
cancellation of debt income. (Note: As stated above, cancellation of debt
income is not taxable in the case of non-recourse loans.)
- A
reportable gain from the disposition of the home (because foreclosures are
treated like sales for tax purposes). (Note: Often some or all of the gain
from the sale of a personal residence qualifies for exclusion from
income.)
Use the following steps to compute the income to be
reported from a foreclosure:
Step 1 - Figuring
Cancellation of Debt Income (Note: For non-recourse loans, skip
this section. You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately
prior to the foreclosure.___________
2. Enter the fair market value of the property from
Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero,
enter zero.___________
The amount on line 3 will generally equal the
amount shown in box 2 of Form 1099-C. This amount is taxable unless you
meet one of the exceptions in question 2. Enter it on line 21, Other Income,
of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property
foreclosed. For non-recourse loans, enter the amount of the debt immediately
prior to the foreclosure
5. Enter your adjusted basis in
the property. (Usually your purchase price plus the cost of any major
improvements.)
6. Subtract line 5 from line 4. If less than
zero, enter zero.
The amount on line 6 is your gain from the
foreclosure of your home. If you have owned and used the home as your
principal residence for periods totaling at least two years during the five
year period ending on the date of the foreclosure, you may exclude up to
$250,000 (up to $500,000 for married couples filing a joint return) from
income. If you do not qualify for this exclusion, or your gain exceeds
$250,000 ($500,000 for married couples filing a joint return), report the
taxable amount on Schedule D, Capital Gains and Losses.
4. I lost money on the foreclosure of
my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of
personal property are not deductible.
5. Can you provide examples?
A borrower bought a home in August 2005
and lived in it until it was taken through foreclosure in September 2007.
The original purchase price was $170,000, the home is worth $200,000 at
foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the
time of the foreclosure, the borrower is insolvent, with liabilities
(mortgage, credit cards, car loans and other debts) totaling $250,000 and
assets totaling $230,000.
The borrower figures income from the foreclosure as
follows:
Use the following steps to compute the income to be
reported from a foreclosure:
Step 1 - Figuring
Cancellation of Debt Income (Note: For non-recourse loans, skip
this section. You have no income from cancellation of debt.)
1. Enter the total amount of the debt immediately
prior to the foreclosure. $220,000
2. Enter the fair market value of the property from
Form 1099-C, box 7. $200,000
3. Subtract line 2 from line 1.If less than zero,
enter zero. $20,000
The amount on line 3 will generally equal the
amount shown in box 2 of Form 1099-C. This amount is taxable unless you
meet one of the exceptions in question 2. Enter it on line 21, Other
Income, of your Form 1040.
Step 2 – Figuring Gain from Foreclosure
4. Enter the fair market value of the property
foreclosed. For non-recourse loans, enter the amount of the debt immediately
prior to the foreclosure. $200,000
5. Enter your adjusted basis in the property.
(Usually your purchase price plus the cost of any major improvements.) $170,000
6. Subtract line 5 from line 4.If less than zero,
enter zero. $30,000
The amount on line 6 is your gain from the
foreclosure of your home. If you have owned and used the home as your
principal residence for periods totaling at least two years during the five
year period ending on the date of the foreclosure, you may exclude up to
$250,000 (up to $500,000 for married couples filing a joint return) from
income. If you do not qualify for this exclusion, or your gain exceeds
$250,000 ($500,000 for married couples filing a joint return), report the
taxable amount on Schedule D, Capital Gains and Losses.
In this situation, the borrower has a tax-free
home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and
lived in their home as a principal residence for at least two years.
Ordinarily, the borrower would also have taxable debt-forgiveness income
of $20,000 ($220,000 minus $200,000). But since the borrower’s liabilities
exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the
canceled debt.
Other examples can be found in IRS Publication 544,
Sales and Other Dispositions of Assets, under the section “Foreclosures and
Repossessions”.
6. I don’t agree with the
information on the Form 1099-C. What should I do?
Contact the lender. The lender should issue a
corrected form if the information is determined to be incorrect. Retain
all records related to the purchase of your home and all related debt.
7. I received a notice from
the IRS on this. What should I do?
The IRS urges borrowers with questions to call the
phone number shown on the notice. The IRS also urges borrowers who wind up
owing additional tax and are unable to pay it in full to use the
installment agreement form, normally included with the notice, to request
a payment agreement with the agency.
Related Items:
This information is made available on this website
as a courtesy to the American taxpayer, from public information made available
by the Internal Revenue Service.
We highly recommend all home
owners seek professional legal and tax consultation before taking any actions. | 
Short Sale Information 
