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Short Sale and the IRS

Hello everyone,

I read an article recently that gave an example of someone who were contemplating going through a short sale. The author of the article (Ilyce Glink) went on to give some specific numbers such as if the owner owed $350,000 on his mortgage and the bank was willing to accept $330,000 for the loan upon the sale on the property than the owner would subsequently have to pay tax on the $20,000 that makes up the difference since the IRS considered the $20,000 as a "Phantom" income in other words as a gift from the bank.

As anyone witnessed this scenario? If yes does the bank issue a special statement after the transaction to the IRS and the seller?

Thank you for your input.

Mario

Posted by Mario Levesque, Tampa Realtor on 08/21/2007 09:49 PM

Comments (6)

short sale, irs

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6 Comments on Short Sale and the IRS

AUG

2007

From what classes I have gone say they "might" be issued a 1099 from the bank. It is not always clear if the bank will. I understand that there was an article entitled "the IRS kick you when you are down". Why else do we have a voluntary tax for.

Mario,

The bank will issue a 1099 to the seller for the difference unless the seller has signed an unsecured note to pay back the difference. You might want to check with a CPA but my understanding is that if the loan was a purchase money loan then the difference does not have to be reported as ordinary income but if the original loan had already been refinanced then the difference or the amount on the 1099 has to be reported as regular income. So yes it does get taxed by the IRS and depending on what state you're in you may have to pay some state taxes also.

Edson and Mario V,

Thank you both for the information.

This is another one of those subject that I feel we need to know more about in order to educate the public. Some people seem to think that short sales are not a bad solution if the bank ends up with the bill but few consider or even understand the whole story. My understanding also is that banks will not agree on short sales unless they are absolutly certain that the seller has no remaining assets, including 401k, IRAs or any other retirement accounts.

Thanks,

Mario L

Absolutely. In today's world the homeowner is liable for the "forgiven" debt due to short sale. They will receive a 1099 and a nice little note from the IRS to add insult to injury. This is just one of the reasons that Real Estate Agents should only use short sales as a last resort for their clients.

APR

2008

Wes - See the recent blog a wrote specifically on this subject at this Sellers always have income..

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales. SHORTSALES@FLORIDA-COUNSEL.COM

APR

2008

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