Posted by B.L.Renfrow on July 05, 2003 at 15:07:21:
No…as I understand it, the seller has to be insolvent at the time the 1099 is issued. If the sale was closed before he filed BK, I think there is a rule about taxes not being dischargeable in a BK unless they are more than three years old. However, I am certainly not an expert in this area, so if one is contemplating such a deal, one ought to seek advice from someone who is.
As for the type of BK, I know it applies with a chapter 7. I’ve seen discussion about whether it does with a 13, but I’ve never seen the definitive answer. (However, I’ve never taken time to search the tax code either.)
As for the risk of set-aside, that’s why you get the trustee’s approval before proceeding. As long as the trustee has approved, you don’t have to worry about it.
I have been working this deal for several months. The seller filed for BK last week. She owes what the house is worth, so a short sale is my only option (will not cash flow on Sub2). I offered to buy this house via short sale before the BK, but the seller didn’t like the tax implications. Her lawyer told her that she can avoid the tax hit, once the house is in BK and is under the control of a trustee. Is this true? Will I be making an offer to the trustee or the mortgage co.? Any advice will be very much appreciated.
Re: Help! Seller in Bankruptcy - Posted by B.L.Renfrow
Posted by B.L.Renfrow on July 05, 2003 at 12:08:41:
At this point, the mortgage company can’t do anything with the property, since they don’t own it, and the seller can’t do anything with it unless he has permission from the BK trustee. So any short sale proposal would have to be approved by the trustee. The trustee’s main interest will be whether there is significant equity in the property which could better be recovered by a regular sale. If not, then it’s unlikely the trustee would have a problem with it.
I’d call up the trustee and describe your proposal. Of course, DON’T mention that you plan to resell for a big profit! Although he certainly can figure it out, no sense in highlighting the fact. Make sure the trustee is aware the seller owes more than the property is worth, it needs lots of repairs, comps wouldn’t support a sale at the balance owed, the lender is agreeable (if they are), and your proposal is really the homeowner’s only option besides foreclosure.
Did you already have an agreement with the lender regarding a short sale prior to the seller filing BK? If not, you certainly can go ahead and make contact with them simultaneously with contacting the trustee.
As for the “tax hit”, I believe the way it works is that once the seller is insolvent (i.e., in bankruptcy) they will be not liable for the taxes that would otherwise be owed on the forgiven debt. Therefore, the seller’s attorney’s advice would appear to be correct.
If he made the deal on a short sale before BK, sellers tax liability would still be dismissed, more than likely, right? Or does that depend on type of BK? If not maybe seller (with buyer’s help?) could work out deal with IRS? Also, what about the ability to set aside the sale? I would think if before the deal balance and fmv were same or negative then even if the buyer makes a big profit, they wouldn’t set aside because the profit wasn’t made from the value of the property, but in the aggreement with the bank.