Short Sales 1099 forms/deficiency judgments
I was on a teleconference earlier this week sponsored by investorwealth.com that featured Dwan Bent-Twyford and Sharon Restrepo and I heard something that really piqued my interest regarding short sales.
If I heard right, when you buy a property via a short sale from the bank, the homeowner that consents to the short sale of their property will receive sometime after the short sale either a 1099 form or a deficiency judgment in the amount of the difference of the outstanding balance and the discounted purchase price. Even though they let you buy their property, it appears that the spread is regarded as income to them and they have to pay taxes on the spread. 
Is that really true? If so, how do you get around THAT objection?
Thanks,
Tim Harris
Eagle Mount Properties
West Chicago, IL
I was just thinking the SAME thing earlier today. It dawned on me that they may treat it in the same manner as a repossessed car. The bank gets what they can from the property and then goes after the "used-to-be-homeowner" for the balance.
I was going to private message derrick ali or one of the other short-sale(er's) on the subject for a quicker response (I have a potential deal that it may affect) but I knew I should direct it to the forum for all to see instead. I was searching through and saw the same question posted by you. Great question! Looking forward to reading the return posts from the gurus out there!
[addsig]
Although I haven't done a shortsale yet, I have Dwan and Sharon's course on shortsale and it states that the spread between the loan amount and the shortsale amount will be counted as income but since the home owner probably didn't have much income anyways that year (which makes sense since they didn't have enough to make their mortgage payments) it shouldn't be a problem.
The ShortSeller should include as a condition of selling short, that the Mortgagee will not pursue a deficiency.
yes, the IRS treats forgiven debt as taxable income, and the Seller will be sent a 1099S... but an accountant familar with 'insolvency' should be able to counsel the Seller accordingly. In most cases the 'forgiven debt' or a large portion of the forgiven debt is not subject to income tax.
Thanks ShortSalePro!
I couldn't have said it better!
Losses/Gains from Legal Action have some form of Tax-Shield (or Forgiveness.)
The same should follow for State Taxes on the 1099---ASK YOUR TAX PRO for details regarding youre own State!
Much Success,
Derrick Ali
Quote:If I heard right, when you buy a property via a short sale from the bank, the homeowner that consents to the short sale of their property will receive sometime after the short sale either a 1099 form or a deficiency judgment in the amount of the difference of the outstanding balance and the discounted purchase price. eaglemount,
What you heard is the rule, but not necessarily always the practice. True, it is the general rule that the borrower who has debt forgiven is considered to have received income for the amount of the forgiven debt.
However, if the short sale is the homeowner's primary residence and the sale otherwise qualifies for the capital gains exclusion, then all of the profit on the sale (including the forgiven debt) is tax free when the capital gains exclusion is applied.
Moreover, the IRS does insolvency does create its own hardship on the borrower. Therefore, the IRS rules do permit forgiven debt to be excluded from taxable income when the borrower is insolvent.
This rule was created back in the 70s when we had runaway inflation. Borrowers with low interest loans were being offered large principal discounts for early payoff of their low interest loans. In short order, Congress revised the tax code to declare forgiven debt as taxable income.
Okay, I'm dumb.
Does insolvency translate to bankruptcy?
Andrew