Where's The Justice?

Real Estate Agent with Cactus Mountain Properties, LLC


I have a Seller who has gone into Default on their mortgage payments.  The current value of the home has dropped 50K below what is owed.  They are considering doing a short sale to redeem their credit before more damage is done.  After contacting the bank, Suntrust Mortgage, I have been told that they would consider all offers on the home as payment towards the pay-off.  The difference, however, would not be forgiven but still owed to the bank.   Here is the dilemma: let's just say the bank did forgive the difference and wrote the couple a 1099 for the amount forgiven.  They would have to claim it as phantom income on their tax returns and pay 32% back to the government for the gain. Does this make sense? Either way, it seems to be a lose - lose situation.  What am I not seeing? 

Posted by

Barb Merrill Works 4 U!

Comments (9)

Sean Allen
International Financing Solutions - Fort Myers, FL
International Financing Solutions

Well, at least the taxes owed on the phatom income would be less than what they would have to pay the bank if they signed a personal guarantee.

Sean Allen

Sep 27, 2007 02:25 PM
Vicky Poe
Good Ole Rocky Top - Crossville, TN
Realtor/ Auctioneer
Saving their credit from foreclosure is worth a lot.  What people tend to forget is that they had the privledge of living in the house that is worth something.  I also agree that your people are in a hard position.
Sep 27, 2007 02:32 PM
anther example of banking screwing the little guy
Sep 27, 2007 02:32 PM
Chris Giddings
Realty One Group - Las Vegas, NV


if this is the primary residence and the home owners have used a down payment along with improvements to the property they may very reduce the tax consequences. My accountant now gives a free consultation to all my clients in this situation and with pre-planning the 1099c in some cases can be avoided altogether. as a foot note, avoiding to long winded of a subject, the irs has also posted on the web site IRS.gov circumstances and worksheets , however this is the irs and once again get the people with the best CPA they can find (not all of them are up on the subject)

a lot of the way the IRS looks at the 1099 is if it is a non-recourse or recourse loan, a google search will help you with that.

something i found of interest which may help is from USA today.

Legislation introduced Monday in the House Ways and Means Committee would exclude forgiven mortgage debt on a primary residence from any income tax. The bill is expected to include debt forgiven since the start of this year. By making the relief retroactive, the legislation would allow tens of thousands of taxpayers who have lost their homes this year to avoid a big tax bill.

On sep 26th the bill was unanimously approved by the ways and means committee now it goes to the house for approval

I strongly urge all agents and homeowners to contact congress on a local level to encourage passing this bill. for thos in the fore closure and short sale arena i wish everyone the best of sucess, keep saving them one at a time.

Chris Giddings.  http://www.erealestateexec.com/archives/august

Sep 27, 2007 02:43 PM
Gary Bland
Century 21 All Islands - Lahaina, HI
What ever happened to the PMI insurance that many Buyers had paid for??  It is never fair.  Is there any way to get caught back up on payments.
Sep 27, 2007 02:49 PM
Jason Smith
DreamDirt Auction - Mondamin, IA
Paying the taxes on the forgiven debt is better than a deficiency judgement for $50,000.  The choice would be easy for me.
Sep 27, 2007 02:52 PM
Chris Giddings
Realty One Group - Las Vegas, NV

In a short Sale, if the homeowner can prove they are insolvent they can gain exemption from the IRS.

In other words, if they have no assets, (furniture TV etc are not included) and all liabilities, they may very well qualify.

Those in Bankruptcy are atomically exempt.



Sep 27, 2007 03:00 PM
Barb Merrill
Cactus Mountain Properties, LLC - Tempe, AZ
GRI, Associate Broker

Thank you, Chris, for the excellent information that will not only be helpful to me but to many other people out there who are trying to find solutions for overwhelmed home owners.

Much appreciated advise,  Barb

Sep 27, 2007 03:45 PM
Lance Winslow
The Car Wash Guy - Malibu, CA
Yes, that indeed is the big controversy, even President Bush is thinking here with his team, this is a common scenario, more common than anyone wants to admit, except maybe a registered agent, combing thru tax returns during audits, because god help you if you let it go and don't pay it, because the IRS won't.
Dec 26, 2007 06:28 PM

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