Short Sale Tax Issues

Most homeowners who 'short sale' their homes owe the IRS money. Homeowners who 'short sale' their homes through Benefacts don't. Read on to find out how...

So you're behind on your mortgage and your house value is declining because of a slow market. Now you owe more than your house is worth. You don't see any way of making up your back payments, let alone this month's mortgage. Everyone you have talked to says the same thing: "Find a new place and see if the bank will do a short sale. You may still have a mark on your credit, but at least you won't owe any money."

In a way, they're right. There will still be a mark on your credit, but it won't be as severe as having a full-blown 'Foreclosure' flag for the next seven years. The bit about "not owing any money", however, may not hold water.

A short sale is when your lender agrees to accept less than what is owed as payment in full. So let's say you have a $100,000 mortgage, and since your house value has declined slightly, it is only worth $90,000 today. Selling your house conventionally (through a Realtor) would cost you AT LEAST $10,000 - probably more. However (in order to avoid foreclosure costs on their end), your lender MAY accept an offer below $90,000. The process of submitting and having a short sale accepted is an art, and only works in certain situations - but it has saved many of our clients from financial ruin.

As mentioned above, if/when a lender accepts a 'short sale' offer, there are SOME financial implications. The most common (in our experience) is what is known as a "1099/Forgiveness of Debt". Let's say a lender accepts $75,000 as payment for a $100,000 loan. Those parties who were on the loan (you) MAY be sent a 1099 tax form at the end of the year for $25,000. Why? Since the lender "forgave" $25,000 of your debt, the IRS views this as "phantom income". This means you may have to pay taxes on that amount even though you didn't actually make an extra $25,000 this year.

For most homeowners, they would owe the IRS an extra $6,250 ($25,000 at 25% tax bracket) come April 15th. However, Benefacts has created a way to minimize or eliminate this extra tax in most circumstances. If you are considering a short sale to avoid foreclosure, contact Benefacts today to find out how you can avoid paying unnecessary taxes.