Short Sale Considerations

JohnMichael profile photo

Before you take on a short sale for your customer, it’s best to talk with a tax advisor about possible tax repercussions on behalf of your customer.



Most likely the IRS will consider the difference between the value at which your customer sells their home and the mortgage balance as “income” on which they will have to pay taxes on.



An exception to this rule is if your customer can prove that they are or were “insolvent" (that their debts are bigger than their assets) before their mortgage lender agrees to a short sale of their property. A tax advisor will be able to tell them for sure whether they would be considered insolvent by IRS standards.



If they can’t prove insolvent, and the tax bill on a short sale would be more than they can pay, you may have to let the mortgage lender foreclose, or have your customer declare bankruptcy.



The lender will have to be convinced that your customer deserves to be approved for a short sale. You will have to tell the lender about your customer's financial hardships, including layoffs, divorce or medical issues.



If your customer has purchased luxury items, like fancy cars or jewelry. The lender will see these debts on your customers credit report and become convinced you’re customer is a loose spender who doesn’t deserve a break.



It may also be necessary to provide the lender documentation of your customer's financial hardship, such as pay stubs, bank statements and so forth.



Short sales take much longer to close than more conventional sales, so plan accordingly.

Comments(1)

  • pushcart29th October, 2004

    I know in a short sale you are not allowed to give the homeowner any money...however is there a way to give them money to be used to help with the tax liability. Could a check go straight to the IRS to be put against their upcoming return which will cover any tax liability? ...especially if there is hardship on their part. I can see motivation for them to want to stop the foreclosure by allowing you to do a short sale. I do not see motivation to stop the foreclosure through a short sale and then have tax consequences...how do you get around that?

Add Comment

Login To Comment