Short Sale: Tax Liability
.On a short sale the amount the bank waives is considered income by the IRS and subject to taxes. For example, if your loan amount is $300,000 and you complete a short sale for $200,000, the amount waived is $100,000. The IRS considers this as income and the borrower will be taxed at his income level. The lender will mail a 1099 and this must be reported to the IRS. This also applies to properties that are foreclosed upon. But keep reading there are exceptions.
Many homeowners will be excluded from owing the IRS this tax. The Mortgage Debt Relief Act, passed in December 2007 applies to debt forgiven through 2012. The debt can be excluded if the following applies:
The home must be primary residence (defined as the borrower has occupied the home at least 2 out of the last 5 years)
The loan amount must be less than $2,000,000 per couple ($1,000,000 for individual)
The amount waived must be less than $500,000 per couple ($250,000 for individual)
The debt must have been acquired to purchase the home or substantially improve the home
Here are the pertinent websites that explain the info you need to know:
· http://www.irs.gov/individuals/article/0,,id=179414,00.html
· http://www.irs.gov/pub/irs-pdf/p4681.pdf
· http://www.irs.gov/irs/article/0,,id=179073,00.html
What if you don’t fall into any of these categories, you own an investment property? There some other options that may qualify the borrower to be exempt. One option is to file insolvent. Insolvency applies when the net worth is a negative (your debts exceed your net assets). For example, if you owe $300,000 on the home, but it is only worth $200,000 and you don’t have an additional $100,000 in assets, your net worth is a negative for the year.
Your last option may be to file bankruptcy. If you file bankruptcy, it is likely you will be able to file Insolvency. If you are considering a short sale or letting a home foreclose, I highly recommend you talk to you tax accountant about all of the consequences That may come into play.
How does a Short Sale Affect my Credit??If you are currently exploring the option of a short sale I Know you have considered how a short sale will affect your credit score, right?”
The answer is, yes it will have a negative effect on your credit score. But the affect will not be nearly as devastating as those of a foreclosure or a deed in lieu of foreclosure.
A Short sale is simply the current market value of your home is less than what you still owe on your loan balance. During this struggling time many homeowners explore the option of a short sale in order to save their credit from foreclosure. The actual process of a short sale will take place when your current Lien holder agrees to accept less than the remaining balance on your home. But your lender must agree on the amount, if not you must explore another option.
A short sale will not be reported as a charge off, foreclosure, and or late payments. It will typically be considered “paid settled” which is not the best, but not nearly as bad as foreclosure. In fact, sometimes lenders will even approve a short sale without even missing a single payment. By doing this the effects on your credit score will be much less than if you were delinquent.
The instance where a short sale has devastating effects on your credit, is when that person has began missing their mortgage payments. Your lender will begin reporting you late to the credit bureaus as soon as your 30 days late, so most of the time your credit has already been lowered even before the short sale.
For example, when you are in the 59 day plus late range and you then decide to do a short sale, your credit may drop 200-300 points. Your credit report will now show what is called “a pre-foreclosure in redemption status.
With that said if you complete a successful short sale while maintaining current on your mortgage your score may only drop about 75-100 points, as to foreclosure which will lower your score anywhere from 200-300 points.
Fannie Mae guidelines now allow a seller to obtain a new mortgage to purchase another property if that seller was current at the time of sale, had no delinquencies exceeding 30 days, and did not agree to repay the debt relief. However, obtaining a short sale before you are yet delinquent on your mortgage is easier said than done.
If you are delinquent on your mortgage at the time of sale, do not expect to buy another home for a minimum of two years. Fannie Mae guidelines require 24 months seasoning. A foreclosure or deed in lieu would result in not being able to purchase a home for much longer and may be many years based on your individual financial situation.
More questions?? Call Debbie at 702-493-8990
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