Real Estate Taxes: Short Sales and no 1099-C income

I’m a fellow real estate broker from Denver. I came across your website via Carnival of Real Estate. I like your site and have gleaned a few ideas from it. Hope you don’t mind. Here’s wishing you a great 2010!

Hi,
I’ve been doing some short sale work here in Mass for about a year now. I find that the amount of work I put into deals not that never close is a killer.
However with the market the way it is it seems to be short sale, bank owned of nothing.

Thanks for the insights from Austin and I will try some of your ideas in my deals. Will let you know if they make me some money.

Thanks,

Chris

I also enjoy your blog. great info! real estate and finance issues are great to keep up to date on for insurance professional as well.

Thanks for the article Michael. I have a couple of friends that need to know this about the tax breaks. I will send them a email with the link.

eric, great site, love the topic. keep up the good work, though i don’t agree with all your comments, still good.

Shorts sales are still prevalent in so cal as well. Working quite a few but primarily for the buyers. I know how much work goes into helping someone in the short sale process as the sellers as well very go info here. Every state is different check with your account on tax issues.

Yes, but what about us still owing the bank for the difference between what the home was worth when we bought it and its current value.

The bank just sent us a $55,000 bill.

We just had to sell it for a huge loss.

There was no question of our staying in the home,and the bank wasn’t interested in a renegotiation. We have no work.

Are we saying that the Congress is not going to alleviate the debt and instead the banks who have been bailed out for hundreds of billions are going to force folks like us into bankruptcy, even though the government has helped them to such an extent that the bank executives are getting bonuses this year equivalent to 10 years of my salary?

Such a cruel place America has become, with the upper 5% always coming out ahead.

If their investments fail, the government seems to always make them whole, but we the people, the other 95% end up in bankruptcy court.

Congress even passed laws the past decade to make sure banks never take a hit by making it ten times more difficult for people like us to file bankruptcy and, as you put it, breathe again.

No such luck.

Beth –

You bring up a great point. If you’re negotiating a short sale with your lender, you need to make sure and include the provision that you are not liable for the difference in settlement.

Short sales, as we see at http://www.gohoming.com will be on the rise in 2010, especially with the influx of REO homes for sale and inability to hit the market. New laws like this will facilitate the effort.

Michael,

I am confused. The CPA I work with advised my client that the 1099 is offset by the property loss in value. For example, you bought a property for $100k with almost zero down. When you short sale it for $60k, the bank issues you a 1099 for $40k. However, your gain is offset by your loss of $40k in real estate investment. Thoughts?

Steve

The deficiency between what is owed and what the short sale sells for is a huge topic here in Florida. The banks have 5 years to collect. I’ve been working with an attorney whose entire practice has turned into negotiating short sales with banks and removing their right to collect at some later date.

Good to know about the tax breaks. I have been working with a few family members on their current housing situations, and will encourage them to discuss these tax breaks with their CPA.

Thanks for the info!

Beth, Eric is correct, in all my short sales we have zaped the provision for the bank to come back after the diff it is foregiven (these where all owner occupied). As for the 1099 work with your CPA there is a process if the property was primary residence that you will not have to pay taxes on the 1099 income and its writen off your taxes.

In the case of my parents the bank 1099 each of them for the write off amount so their 1099 income would be 2x the write off amount.

A short sale is not that bad. In most cases if your primary residence you can get a Fannie/Freddy mortgage in 2 years from the time the short sale happens under today’s lending guide lines.

To be clear, in Florida a debt owner has 5 years to pursue JUDGMENT and 20 years to COLLECT.

Indeed, a property owner absolutely MUST (in Florida – a recourse state) consult with a qualified real estate attorney and accountant.

My entire business is shorts and reo’s. I still encounter list agents who hoot it up when they negotiate a short sale approval, not even realizing they received a lien release only.

They had no clue they SHOULD insist their customer consult with an attorney to confirm (and demand) full payoff & satisfaction.

Great website, Eric!

Mike

We are short-selling our home in FL and just moved to TX. Are you in FL or TX? We need to speak with an attoryney and/or CPA. Thank you

Betty & Gary, if you’re speaking to me, I am in (Sarasota) Florida. As Eric mentioned, you need to confirm “full payoff & satisfaction” in writing before signing off to short sell. If you qualify for short sale (i.e. documented hardship) beware of “lien release” approval letters.

I hope your list agent possesses proven experience with short sales. Rules are changing daily – debt owners are getting more combative & unwilling to give up legal right to pursue collections.

They want MORE money to settle unless you can prove hardship now and in the future.

Hope this helps you,

Mike

Congratulations, Christopher.

Primary vs “investment” is important distinction – totally different rules/strategies apply.

Regarding buying again, Fannie Mae has revised guidelines for buying after short sale, deed in lieu or foreclosure:

**Look at the down payment requirements**

Fannie Mae issues changes the Waiting Period After a Short-Sale or Deed-in-Lieu of Foreclosure:

* Deed-In-Lieu of Foreclosure
o Current waiting period – 4 years with additional requirements after 4 years for up to 7 years
o New waiting period – 2 years for 80 percent LTV (loan to value) mortgage, 4 years for 90 percent LTV and 7 years for higher LTV’s
* Short-Sale
o Current waiting period – 2 years
o New waiting period – 2 years for 80 percent LTV (loan to value) mortgage, 4 years for 90 percent LTV and 7 years for higher LTV’s

With “extenuating circumstances” that caused the need for the short-sale or deed-in-lieu, different guidelines apply according to Fannie Mae:

* Deed-In-Lieu of Foreclosure
o Current waiting period – 2 years with additional requirements after 2 years for up to 7 years
o New waiting period – 2 years for 00 percent LTV (loan to value) mortgage.
* Short-Sale
o Current waiting period – same as above, no exceptions currently.
o New waiting period – 2 years for 90 percent LTV (loan to value) mortgage.

Mike,

Does ‘owner occupied’ mean owner occupied at the time the sale closes? What if I moved away from my principal residence and it was many months before the short sale or auction sale took place? Please let me know where I can find guidance on your reply.

Thanks.

I should have qualified it….I’m referring to both deficiency forgiveness and to the IRS income tax exclusion.

Thanks.

Carolyn, standard disclaimer that I’m not an attorney or tax professional.

Therefore, please ask your attorney.

My understanding is that while the property is in your name with homestead exemption, it is regarded as your primary residence.

Seems to me the property you’re asking about is (was) a primary.

Please let me know what your (an) attorney says.

I try to post updated foreclosure prevention information @ Sarasota Real Estate | Sarasota Foreclosures

Mike

Carolyn,
If you are talking about exclusion of gain on Qualified Princiapal Residence Indebtedness, A qualified principal residence follows the same rules as for gain on the sale of a house (IRC Sec 121, primary residnece for two of the preceeding 5 year, this follow the same rules on gain from sale of primary home). However your question is concerning something different than the original post. Both of these a addressed on IRS form 982. Don’t hesitate to contact me if you have any questions.

Michael White

Michael White,

Thanks for your reply. I think you’re hitting the nail on the head. I think the confusion I’m running up against is in the difference between Debt Forgiveness (COD)INCOME exclusion vs. capital gain exclusion. I’m not looking at capital gains at all as it would be a nondeductible loss for me. I’m looking for the best, most conservative definition of primary residence, principal residence, main home, whatever term the IRS uses – seems they’re used interchangably. HR 3648 says it’s the same meaning used in section 121. Does that mean one would be able to exclude COD from income (by submitting Form 982) (1099-C) if it were for a house that was a principal residence in the “where you spend most of your time” (in the calendar year) sense, or in the “two out of five years” sense? Remember I’m not referring to capital gains.

I look forward to your response. And again, if you were able to provide guidance reference, I’d very much appreciate it.

Michael White,

I think you’ve hit the nail on the head. The confusion I’m running into is the difference between COD income exclusion and capital gain exclusion. This transaction would be a nondeductible loss for me, so capital gains in not an issue. My question is on the COD exclusion (1099-C amount). I think it boils down to the definition of ‘principal residence’. HR 3648 says principal residence has the same meaning as used in Section 121. Does that mean one could exclude COD income on a property that was a primary residence (or main home) in the “majority of the time” (for a calendar year) sense or in the “2 of 5 years” sense? Remember, I’m not referring to the capital gain exclusion, but only to the COD income exclusion. If it’s the “majority of the time”, then would an abandoned home apply if the foreclosure auction (or shortsale) happened in a period outside of that 6 mo. plus one day timeframe subsequent to the abandonment?

I look forward to your reply. Again, I’d very much appreciate guidance reference for your response.

Carolyn,

Good job at being a code geek! If you read sec. 2 of HR 3648, sub section (h) specifically refers to IRC 121 in for the definition of principal residence. There is no ambiguity here. However if you look at IRS pub 4681 pages 7&8, it is ambiguous which leads to the confusion, (trick devils!). This is probably the source of your current CPA’s position as well. So… provided you meet the 2 of 5 year requirement by the time funds hit escrow you should be good. If you are on the edge you may want to spend your time in Florida until the house sells. This may actually help your ability to sell as well.

Michael

I had a closed short sale in July.
Satisfaction says,full payment & satisfaction of said note & mortgage deed, and surenders the same as canceled, & hereby directs the clerk of said circuit court to cancel the same of record. Does this mean I am safe from collection
of twenty thousand deficiency?

I am currently in the process of short selling my home in AZ. I had to move to CA in January of this year for my husbands employment, prior to the close of escrow. This move was our cause of hardship leading us to a short sale. Because I moved prior to the close of escrow does that prohibit me from using the “primary residence” exception in regards to a 1099-c tax liability?