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SELLERS ALWAYS HAVE INCOME FROM A SHORT SALE / DIL / AND MAYBE A FORECLOSURE

CANCELLATION OF DEBT INCOME - WHAT IF THERE IS NO 1099?

When DON'T you have to report forgiven debt as income?

One of the biggest issues that potential short sellers and those in foreclosure ask me is whether they have to get a 1099 for any forgiven debt from their lender. Without a single exception so far, every debtor (borrower) has assumed that if they can avoid a report from their lender that they are being forgiven a portion of the mortgage debt, they will not have to report any income nor pay any income tax on that forgiven debt.

While it is true that a lender need not report cancellation of debt (see 1099 Reporting - It's the Law), whether or not a lender reports forgiven or canceled debt is not the trigger for the obligation of the taxpayer to include that forgiven debt on his or her income tax return in the year the debt was forgiven.

A taxpayer has two opportunities to avoid the inclusion of the forgiven debt and thus the payment of income tax on that forgiven debt:

1. The 2007 Mortgage Forgiveness Debt Relief Act provides non-recognitionof the income otherwise recognized as includable in income of the taxpayer for forgiven or cancelled debt. It is only available for the amount of the original mortgage shortage after a sale on a principal residence - which is a home that is the primary home of the taxpayer for the previous 2 years prior to the short sale or debt forgiveness.

2. Non-recognition of income can also be achieved when immediately before the short sale (and forgiveness of the debt), the taxpayer is "insolvent". This is an interesting definition and there are several articles and court cases on how insolvency is measured, what assets should be included and what liabilities included in the calculation. Generally,

IRC Sec. 108(a)(1)(B) provides that gross income does not include any amount which would be includable in gross income by reason of the discharge of indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent. Although that provision of the IRC may exclude from gross income the gain from a discharge of indebtedness for taxpayers that are insolvent, IRC Sec. 108(a)(3) limits the excludable portion to the amount by which the taxpayer is insolvent. For example, if a taxpayer owns assets with a fair market value of $100,000 and has liabilities of $125,000, only $25,000 (the amount by which he is insolvent) can be excluded if the liabilities were forgiven. Therefore, the calculation of insolvency becomes very important.

Anyone contemplating a foreclosure, short sale, deed in lieu of foreclosure, or bankruptcy needs to become familiar with this situation!

There is more to understand. According to Michael Lampert, a Florida Board Certified Tax Attorney, a taxpayer should properly report that the forgiveness income was received (and this generally is limited to loans provided by persons or entities in the business of making loans - but not necessarily loans amongst family members) and then submit the schedule for non-recognition of that income (on Form 982 from the IRS) with his or her annual 1040 income tax return. He says that generally, the IRS can question that schedule for 3 years from filing. If you don't include the income or if you understate the income, then the IRS can go back 6 years before the statute of limitations runs out. Various events can extend that time, so anyone utilizing this route must consult with a competent tax advisor, according to Mr. Lampert.

THIS ARTICLE SHOULD NOT BE RELIED UPON FOR TAX ADVICE. SEEK THE ADVICE OF YOUR TAX PROFESSIONAL TO DETERMINE THE CURRENT LAW AND HOW YOUR PARTICULAR SITUATION MIGHT BE AFFECTED.

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

Posted by Richard Zaretsky, Florida Real Estate Attorney on 04/16/2008 05:20 PM

Comments (41)

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41 Comments on SELLERS ALWAYS HAVE INCOME FROM A SHORT SALE / DIL / AND MAYBE A FORECLOSURE

APR

2008

It gets more an more complicated. I can't get rid of the feeling that this is a tax on the loss. A lot of people lose their homes not because they calculated the advantages of doing it, but because they depleted their resources, and they simply can't pay it.

You have to have money to become poor, that's what we pretty much are getting.

But forget my rant, Richard, you really put things into perspective and give a reality check to us. I know there are agents out there who do tons of short sales, and I am sure their clients do not understand the ramifications, and as fooled now, as they were when getting terric loans with negative amortization before.

Interesting, who would we, as industry, be blaming a year from now?

APR

2008

Richard,

Here's the scenario. Sellers got an easy loan a few years ago, but this is history. Now they are considering Short Sale. The mortgage that they got, was for a prime residence, and it was planned to be a prime residence, not to take advantage of the lender. The unfortunate chain of events, however prevented them from moving there, and to offset the expenses, they rented it out and it shows on the taxes.

Can the lender declare it fraud and go after the Seller?

Vadim -

The key is the statement you made, and the affidavit they signed when they got the mortgage, that they intended to make the home their primary residence. To escape from that statement the borrower must show that they both had the true intent and that some event indeed messed up that plan. So the "unfortunate chain of events" is the key to what needs to be proven to avoid any claim of fraud in getting the mortgage for a primary residence.

APR

2008

If the lender agrees to the short sale being reported as "paid as agreed" then there is no 1099 on the forgiven debt.

Sidney

The point is that 1099 or not, the income belongs to the seller taxpayer, and it must by law be reported as gross income on the seller taxpayer's income tax return for that year. {There are 2 allowances to avoid the "income" from being part of the NET income for that year. See the blog to understand it.}

The "agreed as paid" affects the credit report - not the taxes.

Basic concept: It's not like you are working for Uncle Jerry and getting paid cash under the table -- the bank is not your Uncle Jerry! And you were suppose to report that cash from Uncle Jerry!

What you mean is that the forgiven debt is still taxable income until the 982 is submitted thereby excluding the amount from the gross income, right? If so, the point is made but the explanation was a bit confusing.

APR

2008

Yes Sidney - that is correct.

The only element is that you have to qualify to file the Form 982 and there are only the two scenarios for such qualification.

A sale of an upside down primary residence and if the borrower is insolvent. I think we agree on everything but have two different ways to communicate the scenarios.

JUN

2008

So, help me out here. We are struggling with 3 mortgages, have had properties listed since January, no lookers, no offers. Our principal home is the one we most want to sell, but have a first for 122,000 and a second for 42000. Cannot rent out our other properties, have advertised and lowered rent and no takers. It's pretty bad here in the rural communities. No one wants to pay the $4 a gallon gas to drive 40 miles to the city. Anyway, we are thinking of moving into one of our rentals and asking for a short sale on our expensive home, but after reading your blog, it is my understanding to avoid capital gains, we should try for a short sale while we live here. Is this correct?

Is it also correct that it won't affect our credit? We both have credit scores in the upper 700's and have NEVER been late with any bills, have never been late on a mortgage and have absolutely no credit card debt. However we have no savings or investments to get us out of this (we used them all to make the monthly mortgage payments and have exhausted them). Should we go to the lender with the second mortgage and tell them of the situation and ask them to detach the second since I think we could manage that one and then when that is done, go to our main lender and talk to them about a short sale?

We are agonizing over these decisions, but it is getting very difficult to stay afloat. We didn't even set out to own rental property, we lived in one property and listed our home for sale several years ago already hoping to sell it, when it didn't sell, we moved back and used the other home as rental . property. We sold it on contract eventually and bought another home to remodel and move into with the thought of trying to sell our acreage again, however we ended up having to foreclose on the land contract on the one house and got it back, so now instead of 2 we own 3!! What a mess. I just want to do the right thing, but we are becoming weary of trying to maintain and pay for all these. Any advice would be greatly appreciated.

The funny thing is I do contract work in loss mit!!! However, I have no experience with short sales or deed in lieus, I only do mods and repays. As a contractor, I don't feel comfortable going to the severity department and asking questions. Sorry so long winded and thanks in advance!

JANA--In order to qualify for a short sale you need to demostrate some kind of hardship and I didn't get the impression of there being one in your situation. It seems you have a bit of a mess on your hands but you seem to be managing to pay the bills even though you might not like doing it.

To answer your other questions:As far as avoiding the 1099 tax attached to the forgiven debt on a mortgage relief. You don't necessarily need to be living in the home for it to be considered your homestead. You will need to show that it was your homestead to avoid the 1099. You will still get the notice from the IRS and it will be forgiven after you sumbit the necessary form to the IRS.

As far as your credit: A short sale has a minimal affect on your credit as the sale itself. The biggest impact is from the missed payments and many lender will not consider a short sale without the missed payments on the mortgage.

Your scenario with payments to second mortgage and asking for a short sale of the first. First of all the planning is backwards. In a short sale the first mortgage gets most of the proceeds and the second gets to hold the hat or gets a very minimal payout.

Jana - Thanks for the questions. I will try to give you some answers. Remember, you should consult and retain an attorney or tax consultant before relying on any advice. The advice in this blog should not be considered a retention of an attorney.

You have a sorry set of circumstances and your financial hardship (sorry Sidney - I don't agree with you) is that you have now burned through all of your savings and you have come to the end of the rope. So it would seem that you indeed do have a financial hardship as you no longer have any remaining assets to use to pay the mortgages every month. You need to consolidate and chose what property to hold onto (and pay with your salary income) and what to let go.

Sidney is correct - you need to address the first mortgage and cut that deal - then go and advise the 2nd mortgagee of their dire situation.

Your credit situation will be affected by the events leading up to the short sale, but most people I speak to say the short sale itself (provided it is reported as a paid debt and not as a compromised debt) will have nominal if any impact on the credit score. See my blog at Credit Reporting and Short Sales for more information on this subject along with helpful comments.

Your capital gains scenario is probably wrong. You would probably have ordinary income from the forgiveness of any debt - should the lender agree to forgive any part or all of the debt. The home that you lived in for 2 of the past 5 years (measured from the date of sale) would be the qualifying 'primary home'. Whether you declared homestead is irrelevant. It is where you lived. Don't forget that there is another escape from the income of forgiven debt - see #2 in the blog you are writing in as based on what you are saying in your question, you probably have sufficient negative net worth to eat up a good portion or all of the "income" you would see from this transaction.

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 and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com

RICHARD & JANA--Most lenders definition of financial hardship goes beyond how much money is in they savings accounts. As far as they're concerned there have been no missed payments and there is no overwhelming debt (i.e.--credit cards) Most lenders need to see some kind of other hardship to go along with this kind of short sale such as a divorce, medical problems, loss of employment. As of right now, there doesn't seem to be a compelling argument for a hardship. It doesn't mean you can't try, but it is doubtful it will be considered.

I'm confused. I bought an investment house at $478K from down-trodden sellers, that rented it back from me with the intention to buy it back in time. They bailed. I owed $388K on a 1st, and $56K on a second. The bank took it back deed-in-lieu. Market value was probably $375K. I got one 1099A only for $388K. How do I proceed? The house was sold within 2 months of my losing it.

JUN

2008

Interesting Louise -

I would get an appraisal of the property as of the date of your deed to the bank. That is the measuring point. I would guess that the value at that time, less the mortgages forgiven (that 1099A) is your "income". The 2nd mortgagee can still come after you for the money on their note, so until they come to an agreement or the statute of limitations runs its course, you do not (in my opinion) have to consider that mortgage as written off and therefore it is not YET inocme. Check with your tax consultant for the best answer.

JUN

2008

I bought a condo in Jacksonville for my daughter to live in during college. She quit within six months and then stayed (pretty much rent free) for another year. We rented it out for six months and then were unable to find a new renter at any price. We depleted all of our assets to keep this place afloat and are now in debt over 100,000 and considering backruptcy. Our primary residence is worth 300,000 but we have mortgages for $442,000(unfortunately 144k is SBA backed business loans and we have been advised that these are not dischargeable). A realtor has suggested a short sale and said that there should be no IRS obligation from the short sale(on the condo in Fl.). Is there any advantage to this if we have to file for bankruptcy anyway? We are already so far up the creek that we can't imagine an IRS obligation too.

SKIP-- You should insult with your accountant and lawyer about the financial and legal issues that pertain to your specific situation but in general this is how it works. On your condo in FL, if it sold as a short sale the difference between the sold price and the amount owed will be subject to a 1099 from the lender, since it not your primary home. In the event you let the property foreclose, the lender could issue a deficiency judgment and you could be on the hook for the difference of the amount owed and the sold price plus the expenses incurred during the foreclosure. The exemption for that would be your primary residence in a short sale. The advantage of a short sale is to avoid having a foreclosure on your credit report that will affect you for almost 10 years. If you go after the bankruptcy, it will not necessarily avoid a foreclosure although it will postpone it.

In my opinion, a short sale is a better alternative to a foreclosure, deed-in-lieu, of bankruptcy as it pertains to the property itself.

JUN

2008

Skip - Sidney is pretty much correct but there is a lot more information you need.

1. For Florida condo - the sold price is not the measure - it is the amount the bank gets from that closing. So the measurement of your income is the difference between the mortgage principal balance and the amount the lender ends up getting from that short sale.

2. The 1099 - Sidney uses this term with too broad a brush. What he means is that the difference (in #1 above) is taxable to you since this is not your "primary residence". But the income you need to report may be excludable under another rule. See #2 in the main article to this blog.

3. Bankruptcy won't avoid a foreclosure. It will avoid liability on the deficiency since you are no longer personally liable for the promissory note. So a short sale in conjunction with bankruptcy does in fact make sense since you avoid that credit hit.

4. The bankruptcy can avoid some IRS issues -- consult your advisor.

Good Luck!

JUN

2008

I have a business with real property. I have missed my one payment and I wanted to see if my lender allows me to do a short sale. If my lender allows me to do a short sale and forgives the mortgage debt and I am sure he will send me 1099. My question is I have S-Corporation for business property. Am I liable for paying taxes for the 1099?

JUN

2008

Peter

I am going to have to guess here that the mortgage is in your name and not the corporation's and that you signed the promissory note personally. If so, the problem you have is personal, not corporate. Read my statements about the 1099 and don't confuse getting or not getting a 1099 with your requirement to report the income.

You need to consult with your CPA.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

JUN

2008

I purchased a condo as a primary residence and lived there for 30 months. I then was blessed with a great woman and family and was forced to move from a 2/2 condo to a home that is my new primary residence. I have lived here for 12 months now. Since the condo was my primary residence for over 2 years of the last 5 years....would that normally exclude me from the 1099 that everyone is talking about here?

Thank you again for the comments...

Rob

JUL

2008

Wow, much needed information for myself to help guide clients even more so to CPA's and attorneys, and knowledge for myself.

I would like to direct clients to this info, do they have to be a member to open this, or may I copy it and e-mail it to them with your info as author and source of this valuable info?

Heather

Thanks Heather -

Why don't you just give them this link: http://activerain.com/blogsview/471742/SELLERS-ALWAYS-HAVE-INCOME

Or copy the article and paste it into a Word page, then print it out. Be sure to get the whole thing including the copyright. It can only be used for your personal use (it can't be sold).

DEC

I have a home I put on the market for sale; ex-friend of family wanted to buy, then later because of some personal issue of his, asked for Option to Buy... I agreed. I had already taken money out of the house to buy a house in GA. Six months into the Lease Option to buy, ex-friend, decided not to buy. During that six months, I was also staying in a new place my mother had bought and to help her (medical problems), I moved there and was planning to live there to help her and travel back and forth to my new place in GA. However, since the ex-friend didn'tbuy, I had to move back into my home. Couldn't afford to pay at my Mom's place too and my house and house in GA. I have a 1st and 2nd on this home, 1st being adjustable, 2nd fixed. The house in GA also has an adjustable (I had planned on refinancing one the home sold), and of which I didn't find out until 2 yrs later (closed to quickly and not able to read the closing documents... trusted the mortgage company that it was fixed). Now all the rates are adjusting. I have however, been able to get both mortgage companiesto waive adjusting and keep the payments the same. I also bought a timeshare in south Florida; thinking this exfriend was buying my home (it's a little bit more complicated as why I trusted he would buy the place, but it's TMI and not relevant for this post). If sale had went as planned in Jan 08, I thought I'd be doing great. I'm retired from the military, get retirement and disability from the military and I'm on social security disability. I get approx $4000 a month from these sources. However, I'm paying out $2700 a month for all these mortgages. This includes, association fees and insurance. This does not include the $1500 a year of insurance for the GA property. A little over half my income goes towards mortgages. Anyway, right after this ex-friend decides not to buy is when the market got bad. I can't sell the house because I owe more than what it's worth, I can't rent it, because individuals can rent or even buy a home cheaper than what I need to get. The place my mother had is available again and she stated I should just let it go and move back. She put a lot of money down and I'd only have to pay about $600 a month there, verses over $1700 I'm paying now. I'm considering a walk away foreclosure or a DLF. I'm a 57 yr old female, my health isn't that great (not dying from anything... yet, lol) aand I don't want to spend the rest of my years paying for all this, it's taking on toll on me. If I walk away or do a DLF, I'll save over $1190.00 a month, that's $14300.00 a year. This is all causing me restless days, I can hardly sleep, worry all the time, I have no money left over for much of nothing. I've also got outstanding credit card debts...well, mostly. I've paid all on time but one, it's so far behind I don't pay them anything, the others I pay on time every month, also I pay the mortgages on time every month, except for one months, I asked to miss one payment, because I didn't have the money to pay the taxes in GA. Here in Florida, since this is my primary resident and I'm disabled, I don't have to pay taxes. I want to keep the house in GA but since it has an adjustable, if I do a walk away or DLF on this house, will I be able to get a refinance fix rate on it? I don't want to keep this house, I don't want to do a short sale either. I just want out! I just want to know the best option, do I walk away and let the mortgage company forclose or do I request a DFL? If the mortgage company refuses a DFL, should I just stop paying and leave forcing foreclosure? What happens to the 2nd, should I inform them both of my intentions? I was told by someone, since I'm disabled, my income cannot be touched, but my retirement income can, which is only about $900 a month. The rest comes from disability. By the way, I was already getting disability when I got into this mess. Will I have to pay the 2nd or can I stop on that too? What would you recommend? I know, I got a little long on my situation too... sorry, but thank you in advance for your response(s).

Lisa, You have a lot issues going into this and it's probably a good idea to speak with a lawyer AND an accountant so you can get an answer as to what is best for you. You mentioned walking away a few times and letting the properties go into foreclosure. You do have the option of doing a short sale on the homes and avoiding a foreclosure. The lenders negotiate to settle the mortgages for less than you owe as long as the homes are sold for close to market value. Again, there are a lot of issues and it might be best to sit down with local professionals. That's my two cents.

I only want to force foreclosure or DLF on one home, the one with the 1st and 2nd. Everything else I want to keep. Thank you Joe, I guess I do have a lot there. I guess my short question should have been, if I do a DLF, can I do it with both the 1st on 2nd on the house. Meaning I suppose, who decides what happens with the 2nd, do I just stop paying that too? I just want out, getting too old for this, deal didn't work out like I thought it would. I don't even want to try a short sale, it seems to be too much of a hassel. The realtor will want most of the money from the sale anyway, there want be any money to pay the realtor nor a lawyer. Finally, can the mortgage company come after my disability pay as well as my retirement pay. Thank you Joe... thanks all in advance who may reply.

Oh, one more thing. I don't have the money to pay an accountant nor a lawyer or realtor. thanks again.

Lisa,

If you just want to get rid of one of the homes and you can't pay for a lawyer or accountant (although those are vital professionals) then you should do a Short Sale. That is when a Realtor puts your home on the market and sells it a market value. At the point of you getting a contract to purchase the home then the agent can negotiate with the lender to accept less than what owe on the property. The beauty of that is that the commissions due to the agent are paid by your lender. There are tax consequences involved with that action but typically those same consequences are worse with a foreclosure. What part of GA are you in?

Lisa - you can gain a bit more information if you read some articles on Short Sale Basics, Floreclosure explained, and Deficiency Judgments - all are available through the Table of Contents (see link below).

Please understand that YOU don't control the foreclosure or the deed in lieu. Your BANK controls those matters. Also, if you have a 2nd mortgage, you don't have a deed in lieu option on that property.

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 and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at TABLE OF CONTENTS - RICHARD ZARETSKY SHORT SALE ARTICLES - 11/1/08

DEC

Thanks for your reply. The property I want to walk away from is located in Florida. If I walk away what happens with the 2nd on the home? Also, here's some additional information: I have a home with a 1st and 2nd mortgage, as I stated above. I'm upside down on the loan. For reasons explained above, I'm still thinking seriously of walking away and/or mailing the keys to the mortgage company. I'm a disabled veteran and receive disability and I also received social security and a retirement income income from the military. Over half on this income goes towards the 1st and 2nd mortgage. My mom has a place I can move into and I have a townhouse in another state that my daughter lives in.. that mortgage is adjustable too as well as on my primary home I'm in now. I was thinking of deeding the house in the other state to my daughter. My question is: can the bank seek recourse on my disability pay and/or my retirement income? I was told they cannot touch my disability pay, but I don't want the bank touching my retirement pay either.. which is only about $900...and can they touch my assets like my car and furniture and the home out of state if it's deeded to my daughter? I'm 57 yrs old, this, all this stress, is effecting my health even more. I don't want to keep living month to month and want to be free of this house. I really don't want to do a short sale. Since I can't do a deed in lieu because of the 2nd mortgage, which is fixed, I just want out. Doing so will save me $14,000 a year, my santity and health. I keep hold, but I'll loose the house anyway in the end, when I'm 80 and the mortgage ballons. No one will refinance, because of the value of the home, and late on some other bills. Credit score is about less than 520. Thank you in advance for your reply.

DEC

Since my last post, as of yesterday, I've went ahead with a realtor to do a short sale. He's listing the property for $179,000. However I owed $250000, which includes $47,000 on a 2nd mortgage. If the 1st agrees, I'll be negative to that lender for $71,000, plus the $47,000 on the 2nd. That's $118,000. $179,000 is not enough I feel to satisfy both companies, so what happens now. I know I'll probably get a 1099 from IRS; is there a form I can submit to IRS for forgiveness once this is over? Also, my realtor told me to stop paying both mortgages. He states, what for, because the mortgage company(ies) need to see I can't make the payment and would be more included to do the short sale. Is this true? Even if the house is up for a short sale, can't the mortgage company(ies) still go ahead with a foreclosure if I'm not making payments? He stated that once the deals done (short sale), sign a promissary note saying I would pay, don't pay, and file bankruptcy. Any advice? I need it pretty quickly. By the way, he says I don't pay them one penny, it's all paid by the mortgage company, ofcourse unless I cancel the deal, I'd then have to pay them $1000.00. Another thing, I want to move, he said I can move anytime I want, I don't have to live here nor make any payments, again, on the mortgage, home insurance or anything. Ofcourse, the insurance is included (escrowed) into the mortgage payment. Am I doing this in the right order? Thanks again for your quick responses.

Hi there! I wanted to give you my opinion on the situation you seem to be in.

1-You shouldn't take the advice of anyone about missing your mortgage payments without first knowing if that is a necessary step to take. Have you spoken with your lender about the possibility of doing a Short Sale? Some lenders do require that the mortgage be behind before they would consider a Short Sale but other lenders don't have that requirement. It is also possible that your lender would be open to forgo that requirement depending on your hardship. It can be made quite evident that you may not have missed any payments but your current situation dictates the probability of that happening quite soon. Missing payments on your mortgage will affect your credit and any other debt you may have. Talk to your lender and try to get them to forgo that requirement, if they even have it.

2-Don't worry about how much the lenders will get as a result of the sale. What you owe is irrelevant as long as you can get a good contract close to the current market value in your area. Whomever is negotiating with your lenders should start negotiating with the first lender and not offer them anything more than $3,000 as a settlement. Try not to negotiate and come to an agreement with the first lien holder because the 2nd will have more leverage and could demand a better payout to them.

3-It is a possibility that one of the lien holders will ask for a promissory note, but that is also a negotiated item and it can be eliminated. It should not be an automatic assumption that there will be a promissory note attached to any settlement. Again, it is a possibility but it shouldn't be a foregone conclusion.

4-Anytime the possibilty of a bankruptcy comes into the conversation you should speak with a qualifed lawyer and your accountant.

5-You deserve the right to cancel you agreement without having to pay for services you might not be happy with. The outcome of this situation could follow you for a long time and you should have the right to chose someone that will give you the best chance to succeed. You might not have the person if you don't feel confident about the process you are beginning.

What part of Florida are you in?

MAR

I have a timeshare mortgage that I have falled behind on, and the timeshare company has offered me a DIL. I have already begun the process of completing the paperwork, but I am concerned about any possible tax consuquences. I still owe a hefty amount, $23,000+, although the paperwork has it written that my debt will then be forgiven. One more thing, I used to be a resident of the USA under a temporary work visa but has already left the US last year. Since I do not earn any money through the USA (or from any job whatsoever), I understand that I am not obligated to file any more tax returns for 2009. However, if this DIL thing with the timeshare pushes through, what should i expect? If the company does not submit a 1099, and if I ask them for paperwork to say that the debt is cancelled, will that mean I do not need to pay taxes for this? Please advice. Thank you.

JUN

We just sold our primary residence as a short sale. The first got most of its principal just not all the fees. The second got $4000 and $1000from the buyer. We also have to sell our former primary residence which was rented for several years. It has been vacant for 1 year. We will be doing a short sale on this one too. We are insolvent, tons of bills not much money. We are worried about the banks coming back for the remainder of the balances. If they submit a 1099 will that mean they are forgiving the balance? How does that part work?

Keri

JUN

Keri - this is an often asked question and I know SOMEWHERE I already did an answer, but for the life of me I cannot find it.

The 1099C is information to the IRS that the reporting entity has cancelled (read, forgiven) debt owed by the identified person - that would be you. It makes common sense that if you say you forgave debt, you indeed forgave debt.

A 1099C can, however, be retracted by filing an amended information report. However doing so is not as easy as just doing it - there are questions to be asked and such reporting can act to prejudice or even harm the income earning person because he or she may have acted in reliance of the report.

So the answer is YES, but....

So if they submit a 1099c next year and we pay the taxes, etc. One should be covered by the homeowners relief...since it was our primary residence. The other we will owe taxes. So do they have 5 yrs. to decide if they will retract the 1099c. We would then have to re do our taxes for this year?? So confused.

Keri

JUN

If you are exempted from the tax by the 2007 Mortgage Foreclosure Debt Relief Act, then it does not matter if it is a short sale forgiveness or a mortgage foreclosure without a deficiency judgment, regardless of there being a 1099C. Remember, it is not the 1099C that is the trigger, it is the forgiveness.

AUG

So in Keri's case, wouldn't her reported "income" from the forgiveness of her two homes be tax exempt; the first property because of 2007 MFD Relief Act and the 2nd simply because she is insolvent? Seems to me if she remains insolvent for 5 years, which will most likely be the case anyway, then the lenders won't have much to recover out of her. It seems to me, the 5 year right to retract forgiveness is something to protect lenders from fraudulent borrowers. If the borrower is broke there is no money to be retracted. If the borrower has money, then they should pay to the degree that they are not insolvent--or suddenly "become" insolvent if skirting debt is their primary concern. I don't know. Maybe I'm missing something because it seems very black and white to me.

We are considering short sale ourselves for all the same reasons as everyone else under the sun--however, the one thing I have heard you say over and over is that if there is "debt forgiveness," there is "income" to be reported. If there is no forgiveness, there is remaining debt to be paid.

Can one be considered insolvent without going through the process of bankruptcy of some sort? Also, seems to me if someone is trying to avoid a retractment of "forgiveness" they should stay poor on paper for at least 6 years. Lay low. Live humbly and pay their dues for a season. What a concept.

AUG

Jenn -

The insolvency rule is not whether you can pay your bills - it is defined by the IRS as asset insolvency so to speak. You take all your assets (include all real estate a CURRENT value - meaning as of the date of the sale of the property just sold and include IRA's, 401's, etc) and then from that asset total deduct all the debt - automobile loans, credit card balances, mortgages, student loans, just about all the money you owe. If you come up with a negative number, then that negative number can be applied against the forgiven debt that is not otherwise excludable under the 2007 Act.

Hope this explanation helps..........

AUG

Need clarification.

In order to qualify for CODI do I need to live and occupy the place for two out of five years, or it would be considered a primary residence just by the fact that the loan was acquired for a purchase of primary residence.

In my case, we lived and occupied the place for 30 months, but moved out and rented it for over 5 years now. Do we qulaify for CODI under the primary residence indebtiness rule?

AUG

You have to go under the IRS rules and definitions if you are looking to qualify for any IRS exemption relating to cancellation of debt income. If you are out of the house for more than 5 years you cannot fit in the definition of having the residence as your primary home for 2 of the last 5 years, unless you have not had a primary home elsewhere (as in you are traveling and you have not given up the home as your primary residence - provable through various usual and customary incidence of having it as your primary residence (ie: address on your driver's license, etc.). See IRC Regulations and Comments for more information on your particular set of facts.

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