Beware Of Short Sales
Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.
The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor's liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
You don't have to pay the tax if you can show the IRS you were insolvent at the time. For most debtors facing foreclosure that is an easy hurdle.
Short sales are looking even better right now. I noticed the inventory is raising locally. Might be a good thing for investors.
I am considering a short sale or a loan modification, because my wife and I bought a second home for investment and the deal went real bad. In 2005 - 2006 We paid over $325,000 for a new house in Homestead Florida. Today in June 2008 the house is worth $180,000 We owe the Bank over $285,000. Renting does not even cover the minumum mortgage payment so we are accruing $500 negative equity each month. Our concern is that if we short sale, foreclose etc. The Bank will place a lean on our Primary Home which has at least $150,000 equity - a lean for the difference would kill us and make our primary home un affordable to pay too. We have good credit and do not want to consider Bankrupsy. Can Homestead Asset protection save us?
What happens if you Short Sale on your new investment home that went bad. It went down over 100,000 in value.
If I Short sale it, can the Bank put a lean on your Primary Homestead Home? Or do they really just forgive you.
My problem is that my primary home barely has 100,000 equity, but if I get tagged by a lean, I will not be able to pay for my main home mortgage either.
Please help.