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Tuesday, April 15, 2008Short Sales - Myths and Reality
The phone calls and emails keep pouring in from consumers who have been caught between a rock and a hard place by the combination of falling real estate values and adjusting loans. It is amazing how fast and hard values have fallen in some areas.
I would like to clear up some common misconceptions about the short sale process.
First, you do not necessarily need to miss payments in order to get a short sale approved. We have successfully negotiated short sales with numerous lenders without the borrower missing a payment. Some lenders that will do this are, GMAC, Homecomings, Avelo, Countrywide, etc.
Second, many borrowers are confused about the tax consequences of a short sale or foreclosure. Basically it works like this, if a lender is unable to recover the loan amount in full, they will issue a 1099 to the borrower for the deficiency balance. In a short sale, the 1099 is for the deficiency between the amount owed and the money the bank netted in the short sale. In the case of foreclosure, the 1099 is issued for the deficiency between the amount owed and the sale price of the property at the foreclosure sale. Generally the highest bidder at the foreclosure sale is the lender. It was very common for lenders to bid the loan amount. Lately though lenders have been getting smart. Lenders have been relying on a Broker Price Opinion (BPO) to determine how much to bid at the foreclosure sale. Many lenders are now bidding less than the loan amount at the foreclosure sale.
Thanks to the Mortgage Forgiveness Debt Relief Act of 2007 borrowers who are issued a 1099 from a short sale or foreclosure are able to exclude the 1099 income from their taxable income (up to 2 million dollars).
Investors and vacation homeowners need to be more wary about the 1099 income. While there is the possibility of writing off the income as a loss, you really should consult a CPA before you do a short sale or a property is foreclosed upon. This is especially true if you did a cash out refinance on the property. Sometimes the tax consequences are staggering. I have had a few clients that were better off declaring bankruptcy due to the tax consequences of a foreclosure.
For more info or if you need short sale help, contact MaryAlice@MnRealEstateTeam.com
Next week…Bankruptcy and Foreclosure.
By Mary Alice Short - RE/MAX Advantage Plus
Short Sale and REO Expert
Member of The Minnesota Real Estate Team
