Caveat: I’m not an attorney or an accountant. I don’t even play one on tv. So, if you or your short sale sellers really want the skinny on the tax implications of a short sale, my best advice is to speak with a reputable accountant or tax attorney.
That being said, I have no problem playing Monty Hall and helping short sale sellers and agents to uncover the right information behind the correct curtain. (You know who Monty Hall is, don’t you? If the answer is no, make sure to read the post script.)
Behind Door #1: Mortgage Forgiveness Debt Relief Act of 2007
Back in the day when real estate agents made a decent living selling real estate, anyone who had debt forgiven would receive a 1099-C. The difference between the amount owed and the debt forgiven would be considered taxable income. But, George Bush passed the Mortgage Forgiveness Debt Relief Act of 2007. After that, the impact of debt forgiveness on short sales became more favorable to many short sale sellers. The Mortgage Debt Relief Act of 2007 was extended through December 31, 2012 (you know… ten days after the world is supposed to end). So, short sale sellers who want to take advantage of the tax relief provided by this act would need to have their short sale closed by the last day of 2012.
Remember, if you are interested in what’s behind Door #1, you and/or your sellers should speak with a qualified accountant in order to learn more about how this curtain may impact their specific situation.
Behind Door #2: 1099-C for Debt Forgiven
Some short sale sellers may receive a 1099-C for debt forgiven. For some short sale sellers, this would mean that the amount of debt forgiven is considered as taxable income. It is the responsibility of the seller and the seller’s account to determine how to handle the 1099-C.
Behind Door #3: A New Car
Sellers participating in a short sale may have credit that has been severely impacted either by a number of missed mortgage payments or, perhaps by the short sale itself. Anyone needing a new car or some other item purchased on credit may have difficulty with loan qualification because of the impact of the short sale on the seller’s credit. If your seller is concerned about the impact of the short sale on credit, check out this short sale vs. foreclosure chart.
Of the three curtains, I’m not sure which one I would choose. The car wouldn’t be too bad, and neither is debt forgiveness. But, if I were to select number #2, I’d definitely consider seeking the advice of an attorney!
P.S. Monty Hall was the host of a television game show in the 1970’s called Let’s Make a Deal. On the program, contestants would have the opportunity to select a curtain (without knowing what was behind it) and win the item behind the curtain. Hall would offer cash to contestants to try to convince them not to gamble and select a curtain.