Northern Virginia Short Sales and Mortgage Debt Forgiveness by the IRS

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Real Estate Agent with Long & Foster REALTORS®, Gainesville, VA VA License # 0225089470

Northern Virginia Short Sales and Mortgage Debt Forgiveness by the IRS

The most common concern a Northern Virginia Short Sale Seller has when I meet with them is, "Can you get my short sale approved?"  I don't have a crystal ball, but three years of experience in the arena of Northern Virginia Short Sales tells me that my clients stand a better chance of approval just by hiring me.  I know what banks are looking for when they review these packages, and I know how to talk to them.  That's not the point of this post.

The thing I think most Northern Virginia Short Sellers should focus more energy on is the inevitable Form 1099 that your mortgage lender(s) submit to the IRS after your home is sold through Short Sale, in Foreclosure or after surrendering your property through Deed in Lieu of Foreclosure.  Seems there's no way to avoid that nasty Form 1099.

A 1099 is the form submitted to the IRS for wages earned when taxes have not been collected.  The mortgage debt that remains in the sale of a home with a mortgage balance that exceeds the sale price, shows in the 1099 to the person who took out the loan. 

Let's say you owe $400,000 on your home, but can sell it for $300,000.  That means you can expect a 1099 from your lender for the difference of $100,000.  If you don't fall into the federal exceptions provided under the Mortgage Debt Relief Act (effective 2007-2012), you may owe income taxes on that $100,000.

There are limits to the amount of forgiveness, but most average Northern Virginia Short Sale Sellers will never touch it (one million dollars for a single person, two million for a married couple.)  Other exclusions would be if the home sold was not a primary residence, or there was a home equity line of credit, or refinance, that did not go to pay for, or improve, the principal residence. 

I'm not a Tax Attorney.  That's why I send all of my Northern Virginia Short Sale Sellers to one.  IRS tax debt will not be waived away with a bankruptcy.  And whether or not a Northern Virginia Short Sale is approved, the owner of that residence will see a 1099 after Deed in Lieu or after a Foreclosure sale.  There really is no escaping the IRS, so it's best to know where you stand as  Northern Virginia Short Sale Seller sooner rather than later.

 

 

 

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Re-Bloggged 2 times:

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  1. Pat Fenn 05/24/2010 08:17 AM
  2. Anne Clark 07/05/2010 12:19 PM
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Topic:
Home Selling
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Virginia Prince William County
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Virginia Foreclosures Short Sales and REO (and Pre-Foreclosures)
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tax consequences of a short sale
northern virginia short sales
mortgage debt forgiveness and short sales

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Ambassador
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Fernando Herboso - Broker for Maxus Realty Group
301-246-0001 Serving Maryland, DC and Northern VA
Maxus Realty Group - Broker 301-246-0001

Excellent advice to refer your clients to a tax attorney. . IRS rules changes based on each particular case and you need a tax attorney to advice you correctly

May 21, 2010 09:55 AM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, VA

Fernando:  Taxes are just not something you mess around with.  I remember one time I had a Northern Virginia Short Sale Seller who had read the IRS Mortgage Debt Forgiveness guidelines and assumed, as an investor, she was screwed.  She asked me to lie for her to her bank.  I asked her if she realized how serious an offense tax evasion was and that she could end up in jail.  I sent her to a Tax Attorney and she called me back a few days later sounding lighter than air.  The attorney had found other tax code items that virtually erased the upcoming tax debt.

May 21, 2010 10:06 AM
Rainmaker
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Elizabeth Weintraub Sacramento Real Estate Agent, Top 1% of Lyon Agents
Put 40 years of experience to work for you
Lyon Real Estate

In California, not only must we deal with the Mortgage Forgiveness Debt Relief Act, but with hard money loans, sellers might face an additional tax burden when they are mortgaged over basis on those cash-out refinances. Sometimes they argue with me when I suggest they talk to a CPA or tax accountant, telling me they are exempt, when I suspect they are not. But I don't give tax advice. Like you, I refer them out. Those who don't take my advice to speak with an accountant, well, they're probably hosed come tax time.

May 21, 2010 10:20 AM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, VA

Elizabeth:  There's nothing like having a Tax Attorney on your side.  They know the tax code and laws inside and out.

May 21, 2010 10:37 AM
Rainmaker
714,035
Jackie Connelly-Fornuff
Century 21 AA Lindenhurst NY
Long Island NY Real Estate Agent

Always, always consult your tax attorney! :)

May 21, 2010 02:34 PM
Rainmaker
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Robert L. Brown
Grand Rapids Real Estate Bellabay Realty, West Michigan
www.mrbrownsellsgr.com

It's good to have an attorney in the wings in this market. Good ones are indispensible.

May 21, 2010 05:24 PM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, VA

Jackie:  When in doubt, you must talk to one.

Robert:  A good tax attorney and a good bankruptcy attorney are must have in the world of short sales.

May 21, 2010 07:00 PM
Rainer
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Ed Macias
Commercial, Property Management, REO
CDPE

I agree that it is a must and at the same time you cover yourself by not providing legal advice

May 22, 2010 10:34 AM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, VA

Ed:  I definitely don't give legal advice, but make sure they understand that they need it and why.

May 22, 2010 11:30 AM
Rainmaker
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Tony Marriott
Associate Broker, REALTOR
Haven Express @ Keller Williams Arizona Realty

People who are solvent but upside down need to consider what they will do if they MUST SELL after the tax break expires at the end of 2012, but BEFORE their property is at break even again.

July 10, 2010 10:01 AM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, VA

Tony:  Consulting with a Tax Attorney is the best answer.  Our job is solely to make them aware of the potential ramifications.

July 10, 2010 10:03 AM
Rainmaker
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Cynthia Larsen
Sonoma County Real Estate Broker
Safe Haven Realty

I forgot the debt forgiveness act was expiring at the end of this year ... whew, 2012 already?!?!?

February 29, 2012 01:46 PM
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Chris Ann Cleland
Associate Broker, Northern VA
Long & Foster REALTORS®, Gainesville, VA

Cynthia:  Yet another thing to get the word out about in the world of Short Sales.

February 29, 2012 02:14 PM
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Chris Ann Cleland

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