Before accepting a Short Sale, homeowners need to know what the impact of a Short Sale may have on their credit score and income taxes.  A Short Sale will always be better that a foreclosure, but there are still issues that a seller needs to know before making the sale.

The ultimate goal is to get the bank to accept the Short Sale amount as payment-in-full.  Sometimes the bank will pursue a deficiency judgment against the homeowners.  As part of the negotiations, require that the bank waive their right to any future deficiency judgment.  A deficiency judgment is simply the difference between the mortgage balance and the discounted amount accepted by the bank as a result of the Short Sale.  Technically, the bank can pursue a deficiency judgment for the amount that they discounted the loan.  For FHA and VA loans, the banks are required to waive the deficiency.  Most of the time, for conventional Short Sales, the bank will either attempt to pursue a deficiency judgment or require the homeowner to carry back a separate interest-free note payable in the amount of the deficiency.  If the bank does pursue this, the amount can almost always be negotiated down, and should be. 

When a bank accepts a Short Sale, the IRS considers the shortage on the actual amount received verses the principle amount that was due to be “forgiveness of debt”.  Furthermore, the IRS deems this “forgiveness of debt” to be taxable income.  In order to be in compliance with the IRS rules, banks are required to issue a Form 1099 for the amount of the debt forgiven.   Should the homeowners participate in a Short Sale Program, they could very likely receive a Form 1099 and be subject to a tax liability as a result of this.  Tax liabilities can be negotiated by the homeowners with the IRS based on the same hardship that they have just proven to their bank for the Short Sale Program.  If and when they receive this Form 1099, the homeowners should consult their CPA for guidance as to how to prove their “insolvency” and negotiate down any liability.  The bank cannot issue both a Form 1099 and a deficiency judgment.

If you are considering a Short Sale to avoid foreclosure, dont’ delay.  Visit www.AvoidBankForeclosureNow.com or call Bonnie Mullinax at 770.606.0054 to get started. 

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