Don't look back! The IRS could be on your heels.

Real Estate Broker/Owner with Brooks Prime Properties Wichita Falls Texas

So you gave up to Foreclosure? The IRS may be on your heels!IRS

If you are one of the thousands of homeowners that felt relief by allowing their homes to
become foreclosed on your relief may be short lived. Many of us became wrapped up in the
ability to use our homesteads as ATM machines and the banks were fine with it. Now, after the
money is spent and debt is rising you find that your home is not worth the amount you have
in it. Yikes! The job market has tightened and you may have even lost your livelyhood.

Or, you had a line of credit with the bank based on the equity in your home. You took a little
vacation, paid off a few bills, had a great December Holiday and "poof" your line of credit
was maxed out. Now you need to sell but can't get the amount owed on your property.

All this adds up to a potential foreclosure. Your bank may have accepted a lesser amount for
the sale of your home and may have FORGIVEN the balance of the note that was not paid. Yea!

Thank you friendly bankers. You knew we were trying and you have forgiven us.

You can opt to allow foreclosure or may be forced into it due to lack of funds. When the
house is gone you may feel better but the relief could be short lived.

Don't look back! The IRS may be following you to add to your debt...they will make you pay.

If you sold your home at a loss of 25% on a $100,000.00 debt the IRS would consider the amount
of the difference owed as income. Yes, Income.

The congress passed a bill in 2007 to
include forgiven debt without tax to mortgage loans.

That's the good news but here's the kicker.

Let's hope you used your EQUITY LOAN wisely.

This forgiveness only applys to the cash out that
went directly into the improvement of your property.

If you did go on a spending spree with vacations, cars, boats, or anything that did not
physically improve the property Uncle Sam will be at your doorstep.

You will have to pay the IRS on the borrowed money as if it were income.

If you took a home equity line of credit  let's hope you bought carpet and countertops.

Any purchase other than a home related purchase will be taxed as income.

If you lost a property other than your homestead such as an investment property or vacation
or getaway property you will be paying too. Your only loophole here is if you can prove that
you lived in the said property for a minimum of two years.

Anyway, thanks for the forgiveness to the homeowners that actually TRIED to improve their homes.
Total forgiveness is a blessing...


even that forgiveness is due to change in 2012.

When you ask, "gee, can it get any worse?"                                 Thank you Stu!

The answer is YEP!

Sally Rackey

Ah, Deb, you're just full of good news!  With a $250,000 deficiency on a primary home, you're telling me my customer still has to worry that, regardless of how much time passes, he's still gonna get screwed?  And regardless of how much tax loss on the property he had at the time of SS that covered the deficiency, he's still gonna get screwed?  Me thinks one would be well advised to talk with a CPA who specializes in short sales -- and yes, they're out there. 

I think there's far too much frightening speculation out there and before one's customer gets scared out of their wits, run your commentary by an IRS specialist, a tax lawyer, a CPA, let them edit it, and then put it on the blog.  We all need accurate information. 

Thank you.


May 05, 2010 10:57 AM
Lizette Fitzpatrick
Lizette Realty - Richmond KY - Lexington, KY
Lizette Realty, Lexington KY MLS - Kentucky Homes

Deb, great post!!  You just got to love our government.  I have no problem with the government to go after those who walk away from their home but to be allowed to keep the fancy items that were on credit cards. COME ON!!!

May 05, 2010 11:23 AM
"The Lovely Wife" The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL

Good Lord Debra...

It's hot in here. I haven't decided if it's from the flames or if it's just because it's so crowded :)


May 05, 2010 11:30 AM
Brian Leavitt
Keller Williams Bellevue - Bellevue, WA

Great post, thank you.  very informative.

May 05, 2010 12:09 PM
Eugene Adan
Adan Properties, Carlsbad, CA (760) 720-9710 - Carlsbad, CA
Carlsbad Real Estate


Thanks for the information.  All of these things I have heard and read.  I have even heard of tax lawyers advising that a seller counter the bank(s) stipulating that they do not produce a 1099 in a short sale agreement, so that they can avoid paying taxes on the forgiven debt.

May 05, 2010 12:18 PM
Deb Brooks
Brooks Prime Properties Wichita Falls Texas - Wichita Falls, TX


All I can say is that if this article "scared" anyone they should simply re-read it! I'm not here to teach anyone or scare them or claim that I'm a tax accountant. I certainly did not point fingers, mis-quote (all in my own words), or bash the IRS or anything else.

To think, one of my little posts could possibly get you so mad. Sounds like it must be a very sore subject. Since I don't deal with short sales or foreclosures I guess I didn't realize what an open wound it must be to you.

And, even if it's your primary home for you to say that it's fine? Talk about untrue. I did differenciate between homestead and investment by the way.

Proving that you are insolvent sounds a bit painful and going bankrupt is a nightmare.

And, you consider this a way to avoid the tax?


May 05, 2010 01:05 PM
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

the IRS is aloways gonna get us for what they can.

May 05, 2010 05:59 PM
Chris Hein
Keller Williams Realty - Carlsbad, CA
San Diego Real Estate
Wow. That's a great post to thnk about.
May 05, 2010 07:43 PM
Eric Helmers
Realty Group, Inc. - Maple Grove, MN
Your Trusted Real Estate Source

I'm with Eric Newman. 

Why are you putting your career and license at risk with an article like this?

You are not a CPA by designation on this site and there is no copy-write or credit to the original author in your post.  Everyone!!  You need to understand your duties.  Hate to be negative nelly, but I see way to many of you commenting on commissions, legal issues and taxes.  STOP!

I have a written addendum all clients sign on my short sales stating I have advised my client to seek advise from a Bankruptcy Attorney and a CPA specializing in real estate and releasing me from any issues that could come up.  I suggest everyone start to do the same if you are not already.


Good News!  Got my third referral this year from a fellow Active Rainer!

Keep your Minnesota referrals coming!  I love helping fellow agents look good!

May 05, 2010 08:51 PM
Gary Pike
Better Homes and Gardens Real Estate Metro Brokers - Powder Springs, GA

Thanks for posting and thanks to John Wheeler (#68) who seems to understand it better than most.  I just tried to have this conversation the other day with a member of our team and it was clear that he didn't know the answer.  However his advise is the one that I will follow:  Have them consult a tax attorney or CPA for this. 

P.S. An Enrolled Agent may be a less expensive way for people to get good solid tax advice with representation.  Not all attorneys and CPA's truly know the tax code, it's just not their specialty.

May 06, 2010 01:06 AM
Steven Pahl
Keller Williams Tampa Properties - Tampa, FL
Real Estate Consultant Tampa, FL 813-319-6423

Quite the topic, rarely do I read all of the comments, but I had to on this one.  I like the idea of

the addendum advising sellers to seek legal and financial advice.

May 06, 2010 08:17 AM
Don Hawley
REIT Homes - Lindenhurst, IL

As Bart Simpson would say "Aye Corumba" :)

Never in my life would I have expected to see someone having to defend themselves for trying to relate the "POSSIBLE" tax implications, written by incompetent legislators, stemming from the housing crisis.

Not only has our tax laws become impossible to navigate but now we have legislation on the books which compounds the very problems that CONGRESS CREATED IN THE FIRST PLACE!

While Congress and this administration is spending the public monies like a drunken sailor - and seeing how I am a retired sailor I think I can use that phrase safely - how about if stop the bickering, take a deep breath and recognize that we, collectively have a very serious problem that we must overcome. Lets grow some thick skins people, recognize the problem and do everything we possibly can to prevent Congress from unleashing such damaging legislation in the future, for they are clearly disconnected from what is happening on main street.

With that said, the company I work for has handled 100's of short sales and the very first thing we tell our clients is that there are possible tax implications and that they should consult with a tax accountant and a attorney. Then we have them sign a three sentence form acknowledging the conversation and then we begin to assemble their short sale package.

As Realtors, I think it is best to keep the process as simple as possible, lest we find ourselves on the "who's who" list of board infractions.

Let's face the facts. If your feelings get hurt because people are trying to understand the problem...perhaps you should try reading poetry and skip the discussion!

May 07, 2010 03:02 AM
Cliff Kavanaugh
Keller Williams Realty of Charlottesville Virginia - Charlottesville, VA - 434-466-5128 -

Thank you so much for such timely information -this was a great blog! 

May 07, 2010 03:06 AM
Greg Nino
RE/MAX Compass - Houston, TX
Houston, Texas

And I see nothing wrong with it! Homes were never meant to be our atm's!

May 07, 2010 06:11 PM
Stephanie Anson


Great article, but I would like to clarify one thing.  The banks forgave the mortgages not the notes.  The banks regardless of the "forgiveness law" have up to 5 years to come after borrowers for the notes and may file on 3 separate occasions.  This is  not well known, however they are starting to sell these notes "paper" off to investors who will come after the money and the banks can wipe their hands clean of the mess and not have fingers pointed at them. 

Sitting at a meeting with a few Bankers this was a direct question of a fellow broker in our firm to a bank VP and he said yes, this is happening and there is nothing out there to stop it.  I believe this bit of information needs to be spread.  I smell lawyers hot on the trails of real estate agents with people crying victim that there agent said they would be forgiven of their debt.  Additional disclosures need to be in place and I have yet to see them warning folks that the forgiveness is of the mortgage and not the note.  Be careful out there folks, it is the wild wild west and Realtors will be a target in this mess!

May 09, 2010 08:18 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

So many comments, sorry i did not read the thread, so someone might have noted this already. The Mortgage Forgiveness Act would also help if at the time of short sale the Seller was insolvent. And this is important to discuss with the tax man

May 09, 2010 10:15 AM
Lenn Harley
Lenn Harley,, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

The practice used by the landowners in The Dark Ages, that of squeszing blood out of turnips is not new to the IRS.

The only way a person can come anywhere near solvency is to declare insolvency in bankruptcy court and get it all over with.

Only then can they start over and sleep at night.

May 09, 2010 11:09 AM
Marcia Pawlowski
Vogler Feigen Real Estate - Hemet, CA

Thanks John Wheeler #68

I've gone over this so many times with tax man and always tell my clients to check with CPA and ortheir Tax advisor. I've been told exactly what you've said and every client is different circumstance, never give them this kind of advise.

May 15, 2010 01:35 PM
Matthew Bartlett
Corcoran Global Living - Hill Top Team DRE Lic. #01353034 - Glendora, CA

Great post Deb! This is a fact that many people do not know about. While each State may have different laws on the books that address this matter. (like California does) we as Realtor's and Agents must make sure that our clients know their may be penalties and therfore they must speak with their accountant to confirm whatever penalties they may incure by selling the home as a short sale.

Best wishes,


May 18, 2010 01:08 PM
Mike McCann Nebraska Land Broker
Mike McCann - Broker, Mach1 Realty Farm & Commercial Land Broker-Auctioneer Serving Nebraska - Kearney, NE
Farm & Commercial Property For Sale 308-627-3700

Deb...Thank you for the blog...I think it is great information that you have made many people aware of. 

The nice thing about living in the USA is you can share your thoughts or info with others...the bad thing is that those who disagree with you can do counterpoints to you and do it in a spiteful, loud, and hurtful manner such as some of these responses.

That being said...I am glad you have not deleted those who disagree or pontificate their position.

I sure think...and I believe the majority of responders to this blog would agree...that you do not need to defend yourself to the negative responses.  Some of those are knee jerk quality and some are sharing their opinion which is different from you or the majority.

For many years I have advised, in writing, that all clients and customers...buyers, sellers, tenants, etc... talk with a licensed and qualified tax expert regarding any tax ramifications on any type of real estate transaction. 

Great blog!! Thanks again.

Nov 21, 2010 03:00 AM