Deciding whether or not to short sale your Nevada home is a big decision. It is not for the faint of heart, and is not a solution simply because you are unhappy your home is worth less than when you bought it. For a homeowner to successfully short sale a home, they need to be experiencing a genuine financial hardship. Once you have established that you are eligible for a short sale, it’s important to understand how a short sale will impact you – negatively. Primarily, a short sale will impact you in three ways: credit damage, tax liability and remaining debt liability.
First, let’s discuss the credit damage. A short sale will negatively impact your credit – don’t let anyone tell you otherwise. However, in a general sense, it usually impacts your credit less severely than a foreclosure. Since credit scores are determined by complex formulas that consider a specific collection of credit reporting data which is different for each person, it is difficult to explain the impact of a short sale in any meaningful way for any one person. It’s important to realize that the real credit harm of a short sale lies not in the mechanics of the short sale itself but in the late payments that usually precede it. As time passes, those entries on any given credit report are given less and less importance because they become historical. Current data is more important than data from years gone by. If you need more information on how a short sale will impact your credit, you should seek legal, tax, and other licensed professionals who can analyze your unique credit situation and perhaps provide more specific guidance relative to your personal situation.
Second, let’s discuss the tax liability associated with a short sale. Many homeowners are surprised at the end of the year when they receive a 1099-C from their previous home loan lender, only to find out that forgiven debt is considered taxable income by the IRS. There are two exceptions that may reduce or eliminate a borrower’s tax liability for this forgiven debt. The first option is insolvency. IRS tax code 108(a)(1)(B) can excuse insolvent borrowers from paying tax on a deficiency if they can prove they were insolvent at the time of the debt relief. This is not a real estate specific exclusion and relates to all debt discharge. IRS Publication 908 defines insolvency. The second exception is the Mortgage Forgiveness Debt Relief Act of 2007. With the passage of this law, a taxpayer does not have to pay federal income tax in debt forgiven for a loan secured by a qualified principal residence. This tax break applies to debts discharged from January 1, 2007 to December 31, 2012. To determine whether you will be responsible for the tax liability associated with debt forgiven in a short sale, you are strongly encouraged to explore this topic further with a competent tax professional.
Lastly, let’s discuss the remaining debt liability you may be obligated to pay when completing a short sale. Many homeowners decide to short sale their homes because they believe their debt burdens will be wiped out completely, only to find out afterwards they didn’t have all the facts. In order to find out whether your mortgage debts are eligible to be forgiven is to determine the type of loan you used to secure the property. Nevada is a recourse state, meaning most loans written in Nevada allow the noteholder to seek compensation for amounts owed – even after taking the collateral. This means your lender can continue to come after you for the amount owed even after they’ve taken possession of your home. They can file suit against you, garnish your wages, and use other methods to collect what is owed to them. Some lenders have the right to pursue a deficiency, but may choose not to. Legal action is time consuming and expensive. In Nevada, lenders have up to 6 years to pursue people for the balance remaining under a deficiency. Lenders may choose to wait until you’ve had time to recover financially and then file for a judgment against you. It is important when you are short selling your home to ensure that the property language is in your short sale approval letter waiving any deficiency balances and specifically forgiving the remaining amounts due. Once you receive your short sale approval letter, you should seek the advice and interpretation of a qualified legal professional to ensure the letter protects you.
Nevada Short sales are complex transactions. Make sure you work with an agent that knows what they are doing and has a team of qualified tax and legal professionals to help you protect yourself and your family – today and for your future.
This article originally published at CarsonValleyShortSales.com on March 8, 2011.