What Will You Owe If You Use a Short Sale to Avoid Foreclosure In the Twin Cities?

What will you owe if you use a short sale to avoid foreclosure in the Twin Cities?

Being delinquent on your home mortgage is usually a disturbing experience. You should be considering your options and the best one for many homeowners to avoid foreclosure in the Twin Cities is a short sale.

With a short sale, a purchase price lower than the amount of your mortgage is negotiated by your Realtor. If, for example you owe $100,000, using a short sale will allow you to sell your property for less than you owe, for example, about $80,000.

This gives your property buyer a discount of $20,000. However, you will still need to deal with that remaining $20,000 in debt. At this point, the lender chooses between a couple of alternatives to resolve the the amount of debt they cancelled.

One option, a deficiency judgment, means you still owe money to the lender. The other means you may owe money to Uncle Sam since the bank would issue you a 1099-C, basically treating the amount of canceled debt as income.

A deficiency judgment is typically filed just before the short sale is completed. In this case, although you have used a short sale to avoid foreclosure in the Twin Cities, a judge rules that you still owe the difference between the purchase price and the amount of the loan. In our example that’s $20,000.

If you have a good Realtor, they should negotiate this away on almost all first mortgages since Minnesota is a deficiency free state for first mortgages when public foreclosure is used. Your Realtor will explain to the bank that if they pursue a deficiency judgment, the short sale will not be completed, the bank will lose more money and the foreclosure process will eliminate the possibility of a deficiency judgment anyway.

Instead of a deficiency judgment, what you will get instead is a 1099-C form with the mortgage company's declaration of a short sale loss. Once you do get the 1099-C form, keep in mind that the canceled debt must be listed as income for tax purposes using Form 982 from the IRS.

However, due to the Mortgage Forgiveness Debt Relief act of 2007 you more than likely will not owe taxes on this amount. This law, which was extended through the end of 2012 provides forgiveness of the amount on the 1099-C if the home was your primary residence and the loan was used for the property - and not a cash out refinance or a home equity line of credit for paying other bills.

There are some other restrictions so check the IRS website and consult your tax professional. For properties that aren’t your primary residence there is hope too! If you can prove insolvency, you won’t pay taxes on the amount forgiven either. Again consult your tax professional for proper guidance.

When you avoid foreclosure in the Twin Cities with a short sale, you will be able to save part of your credit and build your financial life back quicker but there are additional challenges to overcome.

Using a Realtor who is a Certified Distressed Property Expert can help get your short sale approved, avoid a deficiency judgment and connect you with a good tax professional so you can avoid paying taxes on the cancelled debt. Although it takes a bit of time, it's a small investment to avoid foreclosure in the Twin Cities  and save yourself from the long-term damage of a foreclosure.

More information can be seen at our team website: Avoid Foreclosure In the Twin Cities