We’ve got some smart readers out there, and we have a question for you.
Prior to the Mortgage Forgiveness Debt Relief Act that was enacted in December of last year, lenders could issue a 1099 as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. This is not true for all mortgages however.
I received the following question:
It’s my understanding the Mortgage Relief Act only applies to purchase loans for owner occupied properties. The following loans are excluded:
-cash out refis of any type(over the original mortgage balance)
I’ve seen agents soliciting investors to short-sell their rental homes. If an investor is going to "give up" on a property wouldn’t he be better off just letting go into foreclosure? Arizona uses Trust Deeds and I believe the banks have no recourse for any deficiencies(excluding fraud). Will the bank will issue a 1099-C to the owner for the bank’s loss in a foreclosure? I believe they will issue 1099-Cs for a bank’s loss in a short-sale(including all closing costs and commissions).
I’m assuming all these scenarios happen without bankruptcy protection.
I fear that an investor, thinking he’s doing the "right" thing by short-selling, will get hit with 1099-C. If the bank’s total loss is 150K, he will owe $45,000, assuming 30% total tax liability.
So as an investor, are you better off walking or trying a short sale?
L is currently on vacation, so I couldn’t pester him on this one. An online search, though, seemed to generally concur with this posting by a short sale negotiation company:
Amount of Debt Canceled
This is not your loan balance. It’s your loan balance, plus every single little nit picking fee the Lender can tack on. Add penalty and fees too!
In a Foreclosure, these fees and charges are pretty much left unchecked by anyone from the homeowner’s side.
In a Short Sale, either the Listing Agent or a Negotiator can help negotiate a reduction of these charges. In fact everything in a Short Sale is negotiable including the very issuance of this 1099.
Remember, the Lender is reporting this to both you and the IRS as "income". While you may or may not fall under the protection of the Mortgage Forgiveness Debt Relief Act (HR 3648), there is also the State tax consequences to be considered.
That sounds reasonable, but there is no substitute for experience. What do you say readers? What has been your experience- should investors try for a short sale or walk?