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:
-second homes
-investment homes
-cash out refis of any type(over the original mortgage balance)
-HELOCs
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?
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Just my two half-pesos, but I would think the elimination of the 1099 issuance would be item #1 for any bailout legislation.
For investors..I think they are looking at at 1099 whether they like it or not..Most have mutiple properties that are going back to the lender and as the word “investor” implies, you are investing therefore, taking a “risk”. They rolled the dice, most made money during the good years, wasted it and now they want a bailout. Honest borrowers are now paying the price for these investors. Much higher credit scores, larger downpayments, higher interest rates and great chance of being “rejected.”Not because the BORROWER is a bad risk, but because investors/flippers/HELCO freaks ruined it for everyone else…
Our tax dollars are going to bail out enough people, let them(investors) get a 1099 and pay into the system they ruined..short sale or foreclosure it shouldn’t make a difference..
The best thing to do in my opinion is to sign a deed in lieu of foreclosure, “if” the bank offers you one. Normally they only offer it to you if there is equity in the property (which is not really the case in our current market). I do not believe there are ANY tax ramifications and the lender is happy to do it as it keeps them out of court. Your credit report will also show “PAID IN FULL” vs. “FORECLOSURE – COLLATERAL USED”. You basically sign away all interest in the property and voluntarily give it back to the bank. See the link below for a better description. I always recommend that any person facing foreclosure to research all their options and WORK WITH YOUR MORTGAGE COMPANY TO RESOLVE THE ISSUE BEFORE THERE IS A ISSUE. Also, document EVERYTHING.
http://en.wikipedia.org/wiki/Deed_in_lieu_of_foreclosure
twist -
I just flunked the Turing Test
Anyway, seans80, at least you look human
I have never seen a 1099 on a foreclosure. The HELOC issue is another can of worms. It depends if the HELOC was used in the original purchase. If so, then it is non-recourse up to the amount originally used. Any additional credit taken out on that HELOC is treated like credit card debt. Same with new HELOCS.
With respect to short-sale non-owner occupied housing, I have seen the 1099 negotiated out of the deal in commercial properties in years past. It usually involves counter suing the lender for some transgression (real or not). Dropping the 1099 then becomes part of the liquidated damages in a settlement and is not taxable.
The law passed last december allows for income earned as a result of reduction of debt on owner occupied residences, for acquisition debt only. No cash out type loans. If you are issued a 1099 you don’t have to report it to the IRS . There are dollar limits and exclusions to the rule. But if you can get one of those 1099′s instead of a foreclosure it is likely to be way better for you.
This is OT, but I don’t see the blogroll on the left sidebar anymore. Perhaps you are still working on the software upgrade?
TemekuT -
You won’t see the sidebar while you’re reading an article, but if you go to Doom’s home page (by clicking on “Housing Doom” at the very top of the page) the sidebar will appear.
The Mortgage Forgiveness Debt Relief act is only good through 2009. So will a lot of people give there house back in 09? Are if they give it back in 2010 the tax man cometh. That why I think house prices will keep going down.
John , when I am in the postings I don’t have either side links, as it should be. But,when I am on the home page I don’t have the left side blogroll, but I do have the right side articles. I am using Firefox as my browser. I’m wondering if something in Firefox could be suppressing the blogroll links?
How do I produce (the anti-spam word) the left side blogroll? Thanks for any suggestions you or others can supply. I’m not so adept at configuring my computer.
Temeku-
We have had to switch to a newer version of WordPress, and we are still ironing out the bugs. I’ll run your problem by our sys admin.
Sorry Seans80..but just as the property will be recorded by the county as a “Deed in Lieu of Foreclosure” it will also be recorded on your credit as such..it will NOT show as a paid in full. It will still be damaging to your credit.
Also, tax ramifications have to be PART of the deed and that has to be accepted by the lender. It is not a given.
Tobby you may not have encountered a 1099 yet on the foreclosure, unless the property is an investment property. If it is the primary residence there won’t be a 1099.
Dthiessen…getting a 1099 can mean HUGE tax liablities..imagine you home equity lined your home in Florida to a $1 million dollar note..now the bank takes back the property and sells it for $600K…you now have a tax liability on $400K of income..
Also Tobby..suing the lender takes money..chances are if you facing foreclosure..money is a issue..
Income tax is assessed on the amount of debt forgiven, not on the amount recorded on a 1099 C or other 1099. And you may be assessed penalties and interest on amounts owed and not paid. Incurrence of penalties and interest is based on amount owed, not on whether the taxpayer received a 1099 C. In other words, you owe the tax whether you are informed or not.
If the 1099-C can’t be negotiated down or away, the debtor whose forgiveness is not exempt (not purchase money mortgage on primary residence) may want to consider doing a deal that leaves him or her on the hook for the deficiency, or even allowing foreclosure.
The 1099-C form does not have to be issued until collections efforts have not been made for 36 months, and in some states (Connecticut being one), it provides a defense in court if sued for the underlying debt (which is forgiven with a King’s-X behind the back according to the IRS, but not according to sensible state courts).
In any case, as the deficiency balance is sold and resold to various Junk Debt Buyers, a 1099-C may never be issued (a 2006 case, DBA v. Snow requires issuance, but compliance among smaller JDBs is likely to be spotty–an successive buyers are usually smaller and smaller).
There are too many variables to make any strategy foolproof, but cans kicked down the road often enough do tend to just rust out…