Short Sale Tip # 7: 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.
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Thinking About a Mortgage Default? Beware The Taxes Due That’s the Mortgage Forgiveness Debt Relief Act (otherwise known as “The Don’t Kick ‘Em When They’re Down Act”). But it doesn’t apply to every mortgage. …
Hi,
I read through some of your information, and you sound like you know what you are doing on short sales. I read “there is no deficiency judgement” in one of your tips. I took your statement to mean that when the house is sold in short sale and satisfaction of mortgage recorded that there is no deficiency. However, a lawyer told me that if the lender does not agree in writing not to pursue a deficiency judgement then, they still have the option to do so after the foreclosure.
What is your response to that?
Ok, and the reason I happened to visit your site…I closed a short sale on Dec. 30, 2008. My clients had two mortgages, and they were well aware of the tax consequences, etc. However, in 2009 they were issued a 1099 from the first mortgage co. I received a call from them today stating they had just received a 1099 from the 2nd mortgage co.
I searched the IRS site and have tried internet searches. Also left messages for a few accountants I know. Do you know if there is a time limit for the lender to submit a 1099?
If so, I would appreciate the input.
thanks,
Diana
follow up comment on the previous
the home was a primary residence, but had a cash out refinance where the monies were not used to substantially improve the home, so 1099s were important for last years taxes since income loss was at peak. the clients have had a better year this year and the tax liability if it sticks will hit hard.
and, yes i have told them to contact their accountant, etc. but it is nice to get answers as the new issues come up.
Hi Diana..let me very clear…I am not an attorney. Now that I’ve said that…let me say this. If an attorney told you that..run..don’t walk..run..and find another attorney.
We have talked so much about this that you need to read this article: http://www.realestateradiousa.com/2009/03/05/1099-vs-deficiency-judgment/
It has a real funny picture on it because this is driving me batty. So here is my answer again.
A judgment is what occurs when a Judge (guy or gal in black robe) adjudicates a lawsuit and renders a decision. This is called a judgment. Only a judge can issue a judgment. not an attorney, not a bank, not a realtor. Now that you understand that..now we can move forward.
When you are in foreclosure you are in foreclosure as a result of a lawsuit. The bank or mortgage holder is suing you because you are owing them money. The property is there collateral. When you ask for a short sale, you are asking the bank to discount the mortgage. Then someone in your camp will receive what is called a payoff.
Once this ammount is agreed and paid, then the bank satisfies the mortgage. They satisfied it because they just agreed to a PAYOFF..there is no more mortgage. It’s done..finished…over. Since there is no more mortgage they can not sue you for foreclosure or re-posession of the home any longer so your lawsuit is dismissed.
Since there is no more lawsuit there is nothing left under which a judge can render a judgment. People are confusing things and making it more complicated but it really is that simple.
The complication comes in when there are in experienced people operating as short sale experts who don’t get the paper work done right and may leave people like you in a bad position.
I’m not sure of the time frame for the 1099 issuance. i would guess that it would have to be issued in the timeframe for filing Income statements for the year in which the income is actually “earned”. Since I don’t like to guess, I would say check with an accountant as this is probably a real easy question for them.
As for the deficiency judgment question…I’m not guessing at all. ..and oh yeah..I would definitely find another attorney!