Hello,
The
other big issue that may come up when you take your listing that you
will need to address- "deficiency judgment" or the seller being
"1099ed".
These
two issues involve the specific loss to the bank. Let's say the bank is
owed $100,000 and the bank receives $80,000 after the short sale. They have just lost $20,000, what are they going to do about it? That is what we are dealing with here.
Deficiency
Judgment- This would be the bank placing a judgment against the seller
for the $20,000 referenced above. Typically banks do not enforce deficiency judgments. You see the banks must pay property taxes
and doc stamps when they purchase on the property, so they purchase the
property for $100 at the court house. Following this they would need to
prove the fair market value of the property in court (not $100 paid)
thus showing the true loss to the bank. This could be lengthy and
costly so most banks do not do this. NOTE: this is the most important
part of the short sale negotiation with the bank. If you are working
out a short sale for the seller you negotiate with the bank for them not to file a deficiency judgment AND get this in writing. Make sure you do not miss this one!
1099-
Normally when there is a debt from a foreclosure or short sale the bank
must inform the IRS and the homeowner would be 1099ed that amount-
taxed. There was a temporary change to the tax code (Mortgage Forgiveness Debt Relief Act of 2007) and this would not be taxable income if:
1. The transaction occurred between January 1, 2007 and December 31, 2009- Retroactive.
2. The property is a principal residence occupied for two years or more. No investment properties.
3. Only debt forgiven would be for purchase of the property and in some cases refinance money used to upgrade the property.
4. Maximum of 2 million of mortgage debt can be forgiven.
Well I hope that has been helpful. Next week I will get more into the short sale package for submission to the lender.
