Posted by Vernon on December 05, 1999 at 13:36:39:
What about tax liabilities on the buydown from a second
lein holder for a cost of almost nothing?
Short sales… - Posted by Nick
Posted by Nick on December 04, 1999 at 20:50:45:
Sorry if this is too simple for those of you who are in the know; but the term “short sale” is foreign to me. Could someone give me either a definition or an example?
Thanks.
Re: Short sales… - Posted by JohnBoy
Posted by JohnBoy on December 04, 1999 at 23:23:05:
A short sale is when a lender agrees to accept less than the actual balance owed on a mortgage.
Usually these are when the homeowner is in foreclosure. The lender may agree to a short sale in order to avoid the additional time and cost involved to foreclose and accept less to get the loan off their books.
If a lender does accept a short sale they will usually report the amount they discounted as a charge off on the borrowers credit. They will also end up serving the borrower with a 1099 for the loss in order for the lender to write off the loss with the IRS. The borrower will end up being taxed on that amount and have to pay income tax on that as additional income.
Example:
Borrower is in foreclosure. The amount owed to pay off the note is $100k. The lender agrees to a short sale of $80k to settle. The lender ends up reporting the $20k they loss as a charge off against the borrower and serves them a 1099 for the $20k. The borrower ends up having to pay income tax on that $20k in addition to the income they made that year. The new buyer gets the property for $20k less than what was owed on it.
Re: Your Tax Advice Only Partially Correct - Posted by NJDave
Posted by NJDave on December 05, 1999 at 07:52:32:
Your absolute statement “The borrower will end up being taxed on that amount and have to pay income tax on that as additional income” is only partially correct. While the forgiven debt is reported to the IRS and the beneficiary of forgiven debt will receive a 1099, in many cases a competent tax professional can reduce or eliminate exposure to tax liability.
We structure scores of short sales and debt reduction loan modifications for our Clients who include both Investor/Speculators, as well as financially distressed homeowners. For more information about the tax consequences of short sale transactions, or to discuss a specific case, feel free to contact me.
Short Sale = Negotitating a lower pay off even when not in FC? - Posted by Tim (Cleveland, OH)
Posted by Tim (Cleveland, OH) on December 05, 1999 at 05:53:18:
Your explanation raises a question for me. The notion of a short sale comes up when you are dealing with foreclosure. What happens if I am not in foreclosure, but go to the bank to negotiate a lower pay-off just to get it paid off? Carleton Sheets says in his course that whenever you pay anything off in full, ask for a discount.
I can imagine that a bank may be open to discount the amount paid off in times of increasing mortgage rates. Say I have a mortgage rate from a few years ago when interest rates were at an all time low. The bank could loan money out today at considerably higher rates than what my 30 year fixed rate. Wouldn’t I have some bargaining power to negotiate an early discounted pay-off so they can put their money to work at the current higher rate? I woudl imagine that he bank could not write this as a charge off because it was more voluntary on their part and as such woudl not send me the 1099. Do you know if this is correct?
Tim
Re: Short sales… - Posted by Nick
Posted by Nick on December 04, 1999 at 23:41:06:
Thanks.
I appreciate the quick response, the detailed explanation and the fine example.
Re: Short Sales possible even if not in F/C? YES! - Posted by NJDave
Posted by NJDave on December 05, 1999 at 08:02:01:
Had a case two years ago, Seller (not an ideal short sale candidate) was current with mortgage loan, had perfect credit, and money in the bank. Problem was that he owed more on mortgage loan that house was worth, and didn’t want to have to pay difference between sales price and mortgage debt. I didn’t think that the mortgagee would consent to a short sale, but the Seller wanted us to put our reputation on the line… so I accepted the challenge (and our fee)
with no guarantees other than the usual (competent, professional services, etc. We did our thing and the mortgagee agreed to a short sale, The Seller saved about $40K, and in this case he did incur an exposure to income tax liability.