For years Realtor's have been able to sign a short sale listing, throw it out on the MLS at a low price, get 30 offers, and sell the home. Yes this is an over simplification that has left out the tedious avalanche of paperwork, months of utter time wasting on phone calls with $6 an hour bank employees, and seemingly endless Q&A sessions with agents who have never seemed to catch on to how short sales work, BUT... this article is aimed to address a new dilemma that agents WILL face right now, or in court a few years from now.
IRS reportable income from forgiven debt.
The succinctly titled "Mortgage Forgiveness Debt Relief Act and Debt Cancellation" is GONE!
What does that mean for a listing agent's fiduciary obligations to their sellers? They have changed.
In the past it was in our clients interest to sell quickly, and to a buyer that would stick around. Best way to accomplish that? Get a sales price approved by the sellers bank that any buyer would be NUTS to walk away from. But is this in the sellers best interest today? Probably not.
Without pretending to be a CPA, sellers are at risk today of having taxable income on the amount of debt that is forgiven by their bank. Sure having $20,000 of debt forgiven is better than the potentially resulting $5,000 to $6,000 of taxes. But what if the forgiven debt throws the sellers total income into a higher taxable bracket? Or bumps them high enough to lose out on other tax credits? Taken a bit further, what if you had not properly warned a seller about this risk? (And trust me, a single for that says "consult with a CPA about potential tax implications..." is probably not going to hold too much weight in court.
So a seller loses out on some tax credits, get other income bumped to a higher tax bracket, and feels that they didn't understand that this was a possibility. They go talk to their friend Mr. Hungry Attorney, who understands that your broker has a wonderful fount of endless money called E&O insurance. They pull comps, and realize that the home sold for less money that other properties, and maybe even that you had sold other homes in the past to the same investor... Or that because this was only a short sale you did not take great pictures, and did no marketing work, like you typically do on traditional listings. Do you see where this starts to go?
Smart agents today will treat a short sale the same as a traditional sale, maybe even with a bit more finesse. Every dollar that you get in increased sales price represents potential savings in the seller pocket come tax time. Staging homes, professional photography, social media marketing, direct mail campaigns, all should play a part in today's short sale marketing. That with a great disclosure, drafted by your brokers attorney, or board or Realtors, (and possibly even an email or two when you get an offer saying that we MAY be able to get a higher price for this home) could all be helpful.
Remember to stay on top of bank, and tax changed with short sales. They can have a REAL impact on your clients interests, and in turn on how you handle your fiduciary obligations towards your client. THAT is being an EffectiveAgent!
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