What Is A Pre-Foreclosure?

The pre-foreclosure status is when somebody is starting to miss payments. They’re 30, 60, or 90 days behind. It’s inevitable that they’re going to get a letter from the bank or an attorney that says that the property is now going to go to auction. Once they’re at the 30, 60, or 90 days that’s kind of the pre-foreclosure period and people need to take action sooner rather than later because it’s important that the bank gets all the necessary documentation they need in order to do a short sale.

That documentation is going to be the last two months of bank statements, the last two paystubs, the last two years of tax returns along with a hardship letter, along with a financial form that kind of shows all the income flowing into your house and all the expenses that flow out. Essentially that’s the short sale package in a nut shell, along with any necessary disclosure that the bank may want or that the agent may also want.

The sooner somebody can address it the better their case will be during the entire transaction. Gathering the paperwork is a majority of the battle for people. If you make a really strong case for a short sale and you presented all the documents the way the banks want them there is a good chance that if a foreclosure date has been scheduled you can stop the foreclosure.

Are There Short Sale Tax Implications?

Under the Mortgage Forgiveness Debt Relief Act of 2007, if somebody does a short sale in the taxable year of 2013 there are no tax implications if it is your primary residence. That tax amnesty may end at the end of 2013, we don’t know, but if it does end at the end of 2013 what would happen is if somebody did a foreclosure in 2014 and it wasn’t extended somebody could end up owing taxes on the deficiency debt that was waived.

Let’s say they owed $100,000 and the bank forgave all $100,000, well the IRS can still come after you as if you made $100,000 and tax you on that, at whatever your tax basis is. In the year 2013 you’re still okay, however in the year 2014 we don’t know what’s going to happen. I suspect they’ll probably extend that amnesty debt relief act in 2014, but I am not for certain. There is a way around it, you can meet with your accountant and if you can prove insolvency, then essentially your accountant can make that tax liability go away. If somebody goes to the irs.gov website and types ‘tax implications for a short sale’ they’ll get all the rules that are associated with their specific case.

There is a difference if it is an investment property vs. a primary residence and people need to look into that. What I always say is consult with a tax accountant because they know best and you should also consult with an attorney during the process to just make sure that you understand the entire process.