Around such a simple definition spins a world of confusion. Questions abound....some crop up more than others. The following Questions and Answers may help you determine what a Short Sale means to you and your situation.
Q. I owe $500,000 on my house which is now worth $350,000. My payment is going up and I can't afford the new payments so I want to move to another area and have to sell my house. Should I short sale it?A. This is a good example of a short sale opportunity. If you have discussed a Loan Modification with your lender and determined that a Mod is not the right solution for you, then a Short Sale may well be. Just because you may owe more than your house is worth, doesn't mean you have to sell it. As long as you are comfortable and on-time with your mortgage repayment program, you are welcome to stay in your house as long as you like, eventually paying it off and at some point again, enjoying the typical appreciation that goes along with it.
Q. Does the bank sell my house for me in this case?A. No, you have every right to choose the real estate agent of your choice and have him or her list your house for you at a list price that you establish based on current knowledgeable.
Q. I heard that the I have to pay the bank the difference between what I owe and what it sells for or else the bank will 1099 me for the difference in amounts. Is this true?
A. By definition, A forgiveness or Cancellation of Debt from a lender to borrower can be reported on an IRS form 1099-C. Exceptions are:
•Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.•Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
•Insolvency: If you are insolvent when the debt is knowledgeable, some or all of the canceled 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.
•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 canceled debt is generally not considered taxable income.
•Non-recourse loans: A non-recourse loan is a loan for which the lenders 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.
Q. Ah OK, I heard of the Mortgage Debt Relief Act of 2007. How exactly would that apply to my situation?
A. Lets let the IRS answer that question in this series of Sub-Questions and Answers:
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or canceled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain canceled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or canceled debts?
No. The Act applies only to forgiven or canceled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.
How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.
Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.
How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or canceled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.
NOTE: The Tax Regulation can change at anytime. Please contact your tax advisor for any current changes and to assess wheather the information provided herein applies to your situation.
Q. Wow that is overwhelming, but it sounds like I am not responsible for the difference in what I owe and what the house sells for. Is that true?
A. In your case yes. The home was used as your primary residence and falls within the financial parameters of the Act.Q. My neighbor bought his house with no money down and owes $550,000 on his home. He told me he hasn't made a mortgage payment in 6 months. Why doesn't he have to short sale his home?
A. It is hard to speculate on anyone's situation. If he is that far behind on his payments, there is a good chance that his house is being foreclosed on. If the bank repossesses his house, he will have no right to attempt to short sale it.Q. If I can live in my house and not pay my mortgage, why would I want to short sale it.
A. A short sale on your home will adversely affect your credit, to the tune of between 200-300 points. However, Fannie Mae guidelines allow you to purchase a home 2 years after a short sale. Many speculate that home prices will be most affordable over the next 2-5 years. If your home gets foreclosed on, your credit score will additionally be knocked down hundreds of points. However, Fannie Mae guidelines currently require someone with a foreclosure on their credit to wait 5 years before being able to purchase a home again. There are many other factors to consider when deciding whether to do a short sale or foreclosure. You should always contact a real estate attorney and a knowledgeable CPA to determine how both will affect you personally.
The most important information I can impart to anyone who owes more on their house than what it is worth is this...YOU HAVE OPTIONS! If you have concerns or question about your specific situation, write me or call me. I will be happy to discuss your options with you. If I can't help you, I promise I will do my best to direct you to someone who can.
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