· Short Sales
· Posted: 12/22/08 – 05:10:38 P by: Dawn O’Neal & Tom Binder
WHAT IS A “SHORT SALE”? A “Short Sale” is the term coined by the industry for a home that has a mortgage balance owed to the lender/bank that is higher than the home will sell for based upon the current comparable Fair Market Value, (FMV), sales in the area. Prior to the property going back to the bank as a foreclosure, many owners will try to sell their home and attempt to negotiate a payoff short of the full amount owed and thereby salvage a little bit of their credit worthiness. A Seller will not realize any funds from this sale.
HOW DOES THE PROCESS WORK? Usually the owners are behind in their loan payment. After approximately three months, the bank may start the foreclosure process by filing a “Notice of Default”, (NOD), on the property giving the owner notice to bring the property payment, (including all penalties and interest), current or be prepared to have the house sold at auction in a foreclosure sale on the County steps. Most Banks do not want to own the properties and may agree to take a loss by allowing the property to be sold for less than is owed. With the current economy they feel that getting something for it is usually better than expending further costs and getting even less for it from a foreclosure sale.
KNOW WHO YOU ARE WORKING WITH: There are many companies out there right now advertising assistance and facilitation for helping Sellers through a Short Sale. Get references – as in all walks of business, there are good companies and bad companies. Ask them for references of clients that they have represented and what their success rate is for actual closings… and follow up on this information before choosing one to work with.
WHAT ARE SOME OF THE DOWNSIDES TO A SHORT SALE? Generally the lender/bank will only begin negotiations after a Buyer makes an offer. That offer, along with the documentation of the Seller’s situation, is presented to the Lender. IF there are 2 lenders involved, i.e. a 1st mortgage and a 2nd mortgage, the process can become even more complicated and lengthy as both parties have to agree to take less than is owed and disputes many times arise between them as to the degree of loss they will each one accept. While all this is going on, the Buyer(s) will be sitting on the sidelines waiting to hear that their offer has been accepted. Many times they will get tired of waiting, frustrated with being told “wait still another day”, and will simply go away. Also many listing agents have been known to keep several offers on hand without letting the buyer’s agent know that another offer is higher than their client’s offer just on the off chance that one or more buyer will walk away. Many times Short Sales will have many offers on them during the course of negotiations and the last one in line may be the victor IF the property does not go into foreclosure first prior to all documents coming together and successfully closing the escrow with the new Buyer.
THEN WHAT HAPPENS AFTER THE SALE? The Seller is well advised to contact their CPA or Tax Consultant while going through this process to see what their liabilities may or may not be. The full IRS article can be found here on the Mortgage Forgiveness Debt Relief Act of 2007, which was enacted on December 20, 2007 (see News Release IR-2008-17) and applies to debt forgiven in 2007, 2008 and 2009. 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. Here are many of the bullet points:
What does that mean? Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.
Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts? No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.
What about refinanced homes? Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
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 the Form 982 must be attached to your tax return.
Do I have to complete the entire Form 982? 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? You can download the form at www.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 was forgiven? Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled 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.
Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.
If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision? Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.
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, page 4.
Is there anything else I need to know before filing? Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008.
Another source to research is http://www.surviveyourforeclosure.com This resource includes all the tax information and forms you’ll need when facing a foreclosure or short sale situation, and exactly when and how to file.
The bottom line is research, research, research…. Ask questions, get referrals and keep asking until you feel comfortable with the person you are working with.
Dawn O’Neal ~ Broker
Realty World Executive Advantage