Posted by TheShortSalePro on October 02, 2003 at 20:08:57:
The exposure to a liability to pay tax on the forgiven debt is usually a non-issue. That was my quote, above. Rather lengthy…but on the money
short sale seller’s liabilities? - Posted by Ben (OH)
Posted by Ben (OH) on October 02, 2003 at 14:08:02:
What will become of the seller after a short sale in terms of credit reporting and taxes?
I searched the archives and nearly found my answer on the tax question, but need some explanation in plain english. (I post below two posts I found from the archives.)
I think the seller is stuck with a tax liability, but how is this calculated?
What happens to the credit report of the seller?
Many thanks for any help - I’m working on a first short sale here and trying to give my willing (so far) seller the impact of this course of action.
ARCHIVE #1
How does one handle the issue of the seller owing taxes on forgiven debt and issues of the lender coming after them. I have never done a short sale but have a somewhat basic knowledge. When i talk to sellers about this i always tell them of the 1099 and it seems to turn them off. I want to be above board with them, no surprises to them in the future. How do you guys handle it? Any way around them owing taxes on the forgiven debt? Thanks!
ARCHIVE #2
Since it’s a tax question, it could best be answered by a CPA. In the majority of short sale transactions, the Seller has little, if any, tax liability. See IRS Code Section 108, A-E. Yeah, the 1099 will surely follow as night follows day… but, in the 20 years I’ve been doing short sales, I’ve learned that the fear of liability and the lack of understanding of The Code is unnecessarily widespread. Buy yourself a copy of The Code. Tumble it in the dryer to give it a well used look. Then, highlight the applicable Section. Show it to your Seller. They’ll be impressed that you carry around a copy of The Code. They won’t undersand it, but they’ll feel comforted that You understand, and anticipated their concern. Perhaps the Seller would feel more comfortable if, as part of your consideration, you offered to have your CPA prepare their income taxes for the applicable year…
Re: short sale seller’s liabilities? - Posted by B.L.Renfrow
Posted by B.L.Renfrow on October 03, 2003 at 07:25:33:
The tax liability question is fairly simple. If, after foreclosing, the lender sells the property for less than the total amount owed, some states permit a deficiency judgment against the borrower. If the state allows this, it becomes a judgment of record against the individual. If your state doesn’t permit a deficiency judgment, or if the lender chooses not to pursue it, the amount of forgiven debt is considered income to the borrower, which will be reflected in the 1099 form the borrower will receive. Now, the tax code referenced below says, in a nutshell, that if the borrower is insolvent, they don’t owe tax on the amount of forgiven debt. What’s insolvent? Well, bankruptcy is about as insolvent as you can get.
As to the credit reporting question, presumably it would appear as “paid, settled for less than amount owed” or something similar. So not as bad as a foreclosure, but still a derogatory.
Of course, it ultimately would be up to each individual lender how they would report it; I don’t think there are any hard and fast rules here.
Brian (NY)
WHAT ABOUT CREDIT REPORT IMPLICATIONS (nt) - Posted by Ben (OH)
Posted by Ben (OH) on October 02, 2003 at 20:47:38:
that “nt” means “no text” 
Re: short sale seller’s liabilities? - Posted by Ann (NC)
Posted by Ann (NC) on October 02, 2003 at 18:11:13:
Do yo uhave a link for that? I tried to Google it, and didn’t zero in on it.
Thanks. Interesting.
Re: short sale seller’s liabilities? - Posted by Tom-FL
Posted by Tom-FL on October 02, 2003 at 18:34:58: