Short Sale Tip # 4: Confronting The 1099 Issue In Short Sales
Can you imagine losing your home AND being hit with a huge IRS bill? Well if the short sale is not performed correctly and the short sale proposal request is not properly formatted, you may end up sticking the homeowner with a huge and possibly overwhelming tax burden from which they may never recover.
I would not want to be on the other end of that lawsuit when the homeowner comes calling!
Often times, a lot of real estate agents and even more homeowners are unaware of the difference between the 1099 issue and the possibility of a deficiency judgment. That difference is explained in tomorrow’s installment of the Short Sale Tip Series but in confronting the 1099 issue there are two very important things to know.
1. The Mortgage Forgiveness Debt Relief Act of 2007 relieves the homeowner of any potential liability in regards to the shortfall that may occur in a short sale. However, for the most part, this only applies to foreclosures on primary residences.
2. All is not lost on the investment property or second home if the borrower can prove insolvency. The threshold for proving insolvency is much lower than qualifying for bankruptcy. Basically if one’s debts verifiably exceeds their assets they may be absolved with the use of the IRS Form 982.
This may be too complicated for an agent to be involved in and we do not recommend an agent give accounting advice but you can indeed advise the borrower to seek out the counsel of a CPA or tax attorney to see if the IRS Form 982 can help them avoid a possible 1099.
WARNING: Do not let an uneducated agent, broker or advisor tell you otherwise…you can not be issued a 1099 AND a Deficiency judgment. Stand firm and understand that these two animals don’t cross paths. Don’t be fooled by those who tell you they do.
