Short Sale Tax Liability? What Happens After the Short Sale?

In many cases, people choose to sell their home in a short sale procedure because they can no longer afford to keep their homes. Banks consider short sale an alternative to foreclosure and while the borrower might find the short sale option better than a foreclosure, he still must carefully consider the tax implications.

Let’s assume you owe $100,000 on your mortgage and you are no more able to make your mortgage installments. Because of the condition of the economy you might just have the capacity to offer your home for $80,000, leaving the bank $20,000 short. The bank consents to close your document after you pay the $80,000 – all things considered, since 80% is better than nothing.

The problem is that the other 20% is not a gift or free ride. The government sees that other 20% as “income” even though you have never had the money in hand. When you prepare your income tax return you have the $ 20,000 of short sales as income for that year to record and will be required to pay additional income tax on it.

Keep the extra taxes you owe in mind as you complete your short sale process. You need to start putting some extra money away to be prepared when tax season rolls around again. A person would only pay tax if the home was an investment property in most cases due to the Mortgage Debt Relief Act. When this law was enacted, it benefitted those short selling their principal residence.

The 2007 Mortgage Debt Relief Act

In the past, homeowners applying short sales or deeds in lieu needed to pay the amount of the forgiven debt load. However, the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) changed this for certain loans.

The new law provides for tax relief if your deficiency stems from the sale of your principal residence (the home that you live). Here are the rules:

  1. Loans for your primary residence: If the loan was secured for your principal residence and was used to buy or improve the house, you can exclude generally up to $ 2 million of forgiven debt. This means you do not have to pay the deficit.
  2. Loans on other properties: If you default on a mortgage that is secured by property that is not your primary residence (e.g. a loan on your vacation home), you will owe tax on the deficit.
  3. Loans secured by yet not used to enhance main living place: If you take out a credit, secured by your main residence, however utilize it to take a vacation or send your tyke to school, you will owe charge on any deficit.

How to deal with the 1099-c

When a homeowner decides to sell their home, but the house is worth less than they owe on their mortgage (for their Lender), the Lender takes a loss and the homeowner makes $0 on the sale of their home. The loss is negotiated with the lender by your broker.

During the year the short sale occurs the Bank shows a loss in their accounting. Therefore in order for them to indicate a loss, someone has a profit. That person is the homeowner (Seller). The owner is issued a 1099-c, this shows income.

Although the Seller did not get any income, this 1099c, is the phantom income.

The next question is how to deal with the 1099-c.

If the home was your primary residence, The Mortgage Forgiveness Debt relief Act of 2007- INTERNAL REVENUE SERVICE Publication 4681, applies to you. You must have lived in the home for 2 out of the last 5 years, it must be your primary residence and it cancels any debt around $2, 000, 000. This means you’ll not have to pay income tax on the 1099-C, the income will then be canceled or void.

If the house was an investment property, there is a way to avoid the taxes too. The first step is to check with your accountant, then see if you can make technical insolvency claim. In a nutshell, it means that your debts outweigh your assets, in the current real estate market, this is simple. You should claim technical insolvency at the time of the short sale and the 1099-c gets to be void.

The bankruptcy exemption to tax liability: If you don’t get an exception under the Mortgage Forgiveness Debt Relief Act, you may still be eligible for tax relief. If you are able to show you were legally insolvent at the time of the short sale, you won’t be subject to paying tax on the shortage.

Legal insolvency happens when your total debts are greater than the value of your entire assets (your assets are the worth in your real estate and personal property). To use the insolvency exclusion, you’ll have to prove to the satisfaction of the IRS that your debts went beyond the value of your assets.

In short, a large part of whether tax liability of a short sale is dependent on whether the house was a primary residence or not. In most cases, you will pay taxes on a short sale if it was your primary residence. However, all sellers considering the short sale need to consult their tax advisors for more information on whether or not they will be subject to tax liabilities after the sale.


11 Reasons Why Most Short Sales Aren’t Approved

A short sale in real estate is when a property is sold at a price less than the amount owned by the homeowner to the mortgage company, and the mortgage lenders accept the short payoff. A mortgage lender will take the ‘short’ payment if the borrower can continue making monthly payments on the loan if they do not have money to pay the loan all at once.

So why do homeowners opt for short sales?

  • To avoid foreclosure – If a lender cannot make their mortgage payments, they are likely going to face foreclosure, and they can undergo the proceedings of a foreclosure. They opt to sell the property at a lower price than go through foreclosure.
  • They do not have money to continue paying the mortgage – If a homeowner does opt to have money to pay their mortgage, they choose to short sales the property and use the money to pay their loan debt. If the money is not enough, they can continue making monthly payments until their debt is cleared.
  • The homeowner may be moving to a new location – Sometimes a homeowner may want to move, but they cannot find a buyer to buy the price at its original buying price or higher. This may lead them to opt for a short sale. Since they will be selling at a lower price, it will not be difficult to find a new buyer.

11 Reasons Why Most Short Sales Aren’t Approved

1. The homeowner does not have a valid reason for not paying the mortgage
For a mortgage lender to accept a short sale, the seller must have a valid reason for selling. Usually, it could be they cannot afford the mortgage payment, or they are moving and want to sell the home. If the seller does not have this kind of reasons, it will be difficult to convince a mortgage lender to a short sale, and undergo the losses.

2. The mortgage lender prefers foreclosure
Sometimes the prices of the short sale may be too low than the original price, making the lenders opt to foreclose. If the lender determines that the payout from a private mortgage lender will be a much larger loss, they prefer foreclosure. This way your short sale will not be approved.

3. Property title is unclear
The property title must clearly state that you are the homeowner. If the details are unclear, the mortgage lender will not approve your short sale. You could be running a con game. You as the seller must have all the necessary documents, title inclusive that prove you are the homeowner, the buyer or someone left that particular property in your name, making it yours.

4. The homeowner has filed for bankruptcy
Bankruptcy declaration is grounds for disapproval. A lender will not approve the short sale if you are declared bankrupt. This is because in the case that you cannot pay the full amount at once you are expected to make monthly payments. If you are bankrupt, you cannot make these payments. Therefore, your short sale request will be denied. The lender must be certain that you can pay your loan balance.

5. The mortgage lender may have approved the short sale by the homeowner refused to make payment to reduce loss the bank will incur
By approving a short sale the lender will be making a big loss since the property is being sold at a lower price. However, the homeowner and the bank could agree that the homeowner will make payments to cover the loss the lender will suffer after the short sale. If the homeowner is not willing to make these payments, their short sale will not be approved.

6. Unreasonable second lenders
It is important for the bank to meet with the second lender who in this case is the buyer. All property details will be smoother if the two met and discussed terms, including the prices. Sometimes the second lender is too difficult and refuses to meet the first lender. The first lender has no choice but to deny the request for short sale.

7. Tax liens, UCC filings and judgments
The homeowner must pay all liens before they can short sale because any liens under the homes name or the seller’s name will follow them even after foreclosure or short sale. The bank/lender will deny short sale until these liens have been paid.

8. The home is not in good condition
If the home is damaged and requires too many repairs, the mortgage lenders will not approve a short sale. If you are planning to sell it’s important to ensure you repair all damages and leave the home in good shape for the next homeowner.

9. Short sale price is too low
Sometimes the short sale price is too low and too big of a loss that the lender refuses to short sale. If they think they can make more money and avoid the losses by going through the foreclosure process, the lender will often opt for the latter.

10. The bank/lender sold the loan
Sellers fail to understand that at times the bank/lender that gave them the loan could have sold it to another bank/lender. This means that the bank may be servicing the loan and sending payments but not own it. If the bank sold the loan it has no authority over the loan, therefore, it could not approve the short sale.

11. The seller does not qualify
The bank requires a hardship letter from the seller to state why he/she cannot afford to continue paying their debt. If the seller refuses to work out a plan to pay the bank, then the bank will deny the short sale.

A short sale could succeed if the homeowner meets the necessary conditions from the bank. However if not they will be due for foreclosure unless they van manage to make the payments required by the lender. If you intend on short selling, ensure you go through each small detailed that you will require for your request to succeed. Pay your taxes, repair all damages and look for a second buyer that will not be impossible to work worth. Also, ensure the offer made by the second buyer is reasonable enough for the lenders to accept.

Sample Hardship Letter for a Mortgage Loan Modification

Are you behind on your mortgage? If you do not think you’ll be able to get under the current terms of your mortgage, but you are willing and able to be make payments, you might want to consider applying for a loan modification from your lender. If so, you need to write and submit a hardship letter with information about the circumstances that led to the current financial situation combined with a request to consider other loan terms.

Through a mortgage hardship letter, debtors inform creditors that they’re unable to make their mortgage payments. This letter describes the occasion or motive for their incapability, examples of which include being recalled to active navy duty, dying of a co-borrower, divorce, assets damage, activity loss or illness. In the letter, the borrower can also request a loan modification, payment abatement period or some other kind of relief.

By and large, it takes after the arrangement of an essential business letter: introduction, descriptive paragraphs plus a conclusion. The distinction is that, in the conclusion, the borrower makes a solicitation. It is written, marked and dated by the borrower, and should not be emailed. It is sent to the bank or home loan moneylender and turns out to be a piece of the borrower’s record upon receipt. Ideally, to guarantee that the letter is appropriately reviewed, it ought to be sent to a particular loan administrator and not to the general attention of the bank. It should also be dispatched to the existing loan management office and not a bank branch or other place.

Common hardships that financial institutions usually find acceptable:

  1. Loss of employment
  2. Lower Income
  3. Death or Illness (of the homeowner or family member)
  4. Divorce or Separation
  5. Flexible Rate Reset-Payment Shock

Everyone experiences issues in life, and they usually are not your fault. For example, no individual homeowner may very well be blamed for the particular nationwide banking crisis, recession, or housing bubble that this country experienced. These issues have far-reaching consequences and have placed many homeowners in a difficult position.

If you’ve been laid off from your job caused by forces beyond your current control, that is not your fault. Many hard-working, loyal employees lost their jobs at companies they worked in for years due to reasons unrelated to their job performance.

Property holders have missed work on the grounds that they were lamenting the passing of a relative, or they were getting treatment for a physical or emotional sickness. Notwithstanding the money related expenses of managing these occasions, the time far from work means lost wage. Cash is lost going and coming, and it’s no big surprise that individuals encountering these hardships can fall behind on their home loan. The uplifting news is that your home loan bank can take the issues you’ve had into thought while assessing you for a loan modification.

The reason for your hardship is not the bank’s essential concern. What’s imperative to the bank is that the hardship is over, or will be over when they change your loan. They need to see that the issues that made you cause harm have been determined, that you’re in a position to get back on track, and that you merit better terms.

It is worth noting that the hardship letter is just one of the required items in your loan modification application, and you may be refused for many reasons. The best letter in the world does not guarantee success, but it is a necessary piece of the puzzle, and can help the bank to see you as a real person rather than an anonymous name that owes them money.

If you would like to write your hardship letter yourself, it’s important to avoid common mistakes it is important to common mistakes, like writing too much, or failing to comprehend the bank’s point of view.
Whether you need to write your hardship letter on your own or not, still consider consulting with an experienced attorney to assist you through the loan modification application process. Although getting a loan modification approval is never a guarantee, you can increase your odds by working with a lawyer that understands the process and has a proven track record. Utilizing the services of a foreclosure defense law firm will allow you to present your best self to the bank, and frees you to recover from your hardship and work on improving your situation.

Remember, a real, legitimate, and genuine articulation demonstrating your purpose behind the asked for loan modification, deed in lieu, or a short sale is the best. Property holders can likewise check their qualification for the HAFA Short Sale including the $3,000 Seller Relocation Assistance before writing the Hardship Letter. Utilize the free Sample Hardship Letter guide to offer you some assistance with overcoming writers’ block and compose a successful Hardship Letter however never manufacture a Hardship Letter that is not totally reflective of your individual circumstance or duplicate somebody else’s Hardship Letter.

While there isn’t guarantee that your request will be granted, lenders are often willing to do business with borrowers who are proactive in seeking modifications as opposed to allowing outstanding financial loans to fall additionally behind and shift toward foreclosure. You may uncover (as do many) that this banker is willing to do business with you to maintain your home.

Disclaimer: Readers with credit, legal and tax questions are advised to seek the advice of an attorney or tax advisor. The above information should not be construed as legal or tax advice.

Download a free loan modification hardship letter guide here at:  You may need to fill in your name, email and state before you download

PS: You can download and upload to your site, citing reference, whatever works…


Virginia Short Sale Laws You Should Know About


Foreclosures, short sales and bank claimed properties are making up a bigger rate of the stock of accessible properties nowadays. We felt immune for quite a while, but these entrenched correction has also had an effect here in Virginia. Here are some basic things you should know about short sale and their disposition.

  1. If it’s a deal you want, risk is a part of the equation. When you get hold of a foreclosure in Va, you are buying it “as is” which could include unfiled technicians liens or some other clouds on title. Vigorous research which includes property inspections and also title work offers you some idea on the deficiencies, but there tend to be no guarantees and no recourse should you be surprised. Still, picking up home for well underneath market value and also turning them into rentals is usually an excellent investment for the people with the assets to rehabilitate these properties and wait for the marketplace to rebound.
  2. REOs or bank owned properties are usually those properties that have gone through the particular foreclosure process and also have been bought back by the bank. These properties are generally in better situation than foreclosures because the banks are likely to protect their assets to some extent. They are most often listed with Realtors in order that they are easily accessible for viewings. These “bank assets” are usually priced below market value to go fast. REOs often possess multiple offers when they come available on the market. Astute buyers realize that they cannot expect any concessions either in price tag or repairs, and if needed financing they should present a full loan application with the financial institution that owns the home with their authentic contract.
  3. A short sale occurs when a seller cannot acquire enough money from the sale to pay off existing debt. If the seller has no other assets to go after, the bank can agree to let the property go for a price lower than what is owed. It may happen that you negotiate with the owner of the house, and you would have a ratified contract with the owner, but you do not have a deal until the bank has signed off on the short sale. Short sales are clearly more attractive to banks compared to foreclosures which cost banks $50, 000 on average and will become less cumbersome in the foreseeable future as banks recognize the necessity of moving inventory.

So, you need to sell a short sale in Virginia, here are few regulations you should know about:

  1. The Short Sales Request

Homeowners who would like to try a short sale in order to avoid foreclosure must request permission for this from their loan provider. Lenders will often approve a short sale to stay away from the lengthy and costly means of foreclosure and avoid getting the home as a real estate owned property.

Lenders will most likely approve the short sale of the home. Home owners who ask for a short sale from their bank may be required to prove financial hardship such as a job loss or medical bills. Home owners might also need to provide the lender with pay stubs and also bank statements.

  1. Deficiency Lawsuit

Homeowners who sell their apartment through the short sale process may want to obtain information on paper from their lender regarding credit rating and deficiencies. Once the property is sold this way, there will certainly be a difference in the actual loan amount plus the amount received in the short sale; this is generally known as a deficiency.

Virginia lenders may file case against the homeowner for the amount of the deficiency, unless the homeowner receives a statement in writing that the lender won’t sue for a new deficient balance. Lenders often report a short sale as satisfaction on the debt. However, lenders may report this short sale as settled at under the full sense of balance owed, which can damage the homeowner’s credit rating. This may certainly be a better option than foreclosure, which can stick to the homeowner’s credit report for up to 10 years.

  1. Taxation

Homeowners in Virginia should seek the advice of a tax professional before obtaining approval for a short sale. When a house is sold in a short sale, the lender may claim the amount of the debt that had been forgiven as income provided to the homeowner. This means that homeowners may be forced to pay tax on this amount the following year. Homeowners who meet standards of insolvency by the IRS at the time of the short sale cannot be required to pay tax on this amount.

  1. Real Estate Brokers

There is absolutely no state law that will require you to hire a licensed agent to sell your home in a short sale. The bank however might have to have that you list your home for sale with a local real estate professional to ensure you are undertaking everything possible to have fair market value for that property. They can’t force you to list your home with an agent, but they can refuse a short sale if you don’t.

  1. Financial Info

For the most part the bank will need to see that you don’t have the ability to keep on making your credit installments until it is paid off as concurred when you acquired the cash. Because of this they will need to see a reason for you to sell your home. If you claim that you cannot afford to make your payments, they will require proof. This is done by having you supply tax returns, bank statements, and recent paystubs and a short sale hardship letter. There are some short sale programs that require a restricted measure of documentation which would dispose of the need to supply private financial documentation.