The house has been vacant since 2002 when it had a fire. She was renting it out at the time. It wasn’t her primary residence. The past due payments, interest, late fees, etc. have been adding up since 2002. The current mortgage holder insists that she sell it herself or via short sale with her cooperation and she tells them just to take the house back she doesn’t want it and they refuse. She has had no apparent consequences or hasn’t felt any so she doesn’t want to sign off on anything. Especially if there is a financial consequence.
I have been working with a seller for about a year. She has a home that had a fire in 2002. She claims that insurance was paid to mortgage company at that time and at approximate time note was in transition to new mortgage company. ie (Bayview Financial) Bayview has demanded payment from her since then and she tells them they can have the house back. They want her to sell the house and or find a buyer and are willing to do a short sale.
This is where I come in and am willing to buy. Seller says that she will not sign any documents that she will incur consequences with. (1099 or judgement). They can have the house back. Bayview says that they will only deal (short sale) with her and to furnish the usual docs needed. She says no. Bayview says they will 1099 her but won’t pursue a judgement. What should I do to move this forward?
If the mortgagor has lived in the property 24 months out of the last 5 years she has $250,000.00 write off against any gain in the sale of her principal residence. Chances are the deficiency will not come anywhere near that. The foreclosure is a sale of the principal residence. The lender will send a 1099c and any competent tax preparator will be able to avoid any tax consiquence in this case.
And can be a taxable event. Foreclosure can also be taxable event. Debt relief is debt relief, no matter how it is packaged. Short sale has no corner on the market of debt relief.
You would be best served to understand the consequences of Debt Relief, and you can do so by internalizing the data in IRS Publication 544, page 5.
What is best is to have the homeowner seek tax advice from a competent tax adviser. What I do is offer to explain this to them, and then offer to have my CPA, at my expense, prepare their taxes in the year of the short sale… This seems to get you beyond that point. I also have homeowner sign a disclosure that says that they are NOT relying on my advice as to taxes, and I have recommended they seek competent tax advice.
Just because the homeowner gets a 1099, does not mean that the amount of debt forgiveness is taxable. In fact in most cases it is NOT taxable. Most folks that qualify for a short sale will meet the test of the forgiveness of debt escaping taxation on the forgiven amount. Generalization, but it is usually the case. Lenders are not in the business of forgiving debt that is otherwise collectible… If the homeowner has a negative net worth, prior to the debt forgiveness, this will eliminate taxing from being owed on either a short sale, deed in lieu or a foreclosure. It is measured prior to debt relief, and has nothing to do with where they stand after relief.
I agree with Luke(NC)…you, the seller and possibly the mortgagee are all trying to find a way to skirt the federal laws about mortgage relief…Hell hath no fury compared to the tax man who finds out he has been cheated…move on…stay clean.
Posted by USA_Dave on January 18, 2007 at 13:31:41:
Have your Seller consult a non profit housing counseling org (perhaps a conference call) that advocates and choreographs preforeclosure shortsales for info and guidance. Email me privately and I’ll provide the URL.
Re: Short Sale / Foreclosure - Posted by Marc Donovan
Posted by Marc Donovan on January 20, 2007 at 18:48:56:
Don’t agree. This is a forgiveness of debt, which is regular income. The law you are talking about is for cap gains. Those rule books are very rarely able to offset one another.
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I don’t think the seller is trying to skirt the laws. She was told by someone at the insurance co. that they paid the lender. The lender at time of fire just so “happened” to have been selling the note to another lender. So she believes that she is not responsible. So she told them to just take the house back. As far as what Bayview is trying to do I don’t have a clue. I just want to buy the house from someone and realize the equity. I am sure that there had to be some sort of insurance in place if there was a mortgage. So there maybe more to the story than we know. The seller is older and I would think that Bayview would want to resolve this while she is still around. I guess the best thing to do is to tell Bayview to call me when they figure something out.
There is a lot of equity to be had in this one and it has become more of a challenge to clear it up. I hear what your saying and common since says to go around the wall and not through it. Move on. Thanks
Thanks Dave, I will email you privately. I guess the question is if Bayview forecloses they could still send her a 1099 if they sell it for less than owed. Although they have been letting the clock run since 2002 with no payments or interest paid. BPO says the property is worth probably land value or a little more. Taxes are just shy of that. She is on Social Security and basically receives nothing. They want info on her bank account which scares her into not signing. She welcomes the foreclosure but Bayview won’t. I can’t figure out why they won’t or possibly consider a Deed in Lieu of instead and just have me buy from them. Mean while mortgage payments, late fees, and taxes continue.
Yes, David as we often learn there is a lot more to things than we initially realize.
Strange things have happened in the insurance world…one of the strangest that I recall hearing about was a very famous bridge that was supposed to be insured but the agent put the $$$ in his pocket…and lo and behold the bridge failed.
Then the other thing to consider…you said the owner is older…there might be the competent/incompetent situation here…maybe he/she was paid off and has forgotten it.
I am sure if you dig deep enough and long enough you can get to the bottom of it.
Posted by Marc Donovan on January 20, 2007 at 18:41:58:
Most lenders won’t do this. The deed in lieu will transfer subject to all the warts. Foreclosure wipes off all warts.
They will send a 1099 on anything less than full payoff, but if she is insolvent she will not owe any taxes. She needs to file the form that shows she is insolvent at the time the debt is forgiven.
They need to send the 1099 in order to charge off their loss against their own tax bill.
Thanks for your reply. You may be right about the insurance company. She is competent right now and that is not a problem. I’m not insinuating that she is too old but she is probably in her 70’s.
She receives less than $500 a month from Social Security and is worried that they will somehow take that and this is why she doesn’t want to give out her bank account information. I may get a another authorization to talk to the insurance company and her attorney. Maybe then I can get to the bottom of it.
Re: Short Sale / Foreclosure - Posted by Marc Donovan
Posted by Marc Donovan on January 20, 2007 at 18:45:34:
They can’t take that. If they send a 1099 (95% of the time that’s what happens), they cannot get a deficiency judgement. They don’t have the same powers as the IRS.