If you owe more on your real property than what it is worth, you might consider doing a short sale or deed in lieu of foreclosure. Here are the basics that you need to know about both:
Overview
Short Sale
A short sale is the sale of a real property for less than the total debt balance remaining on the property, including mortgages and other liens. In a short sale transaction, the seller or mortgagor (i.e. borrower) negotiates with the mortgagee (i.e. the lender) and other lien holders in order for them to accept the proceeds from the sale in exchange for releasing the mortgages and other liens on the property. Short sale is often preferable to foreclosure because: (1) it can and often does result in a deficiency waiver, whereby the lien holders will cancel any debt that the mortgagor would have otherwise owed after the transaction; (2) it has less of an impact on a mortgagor's credit score; and (3) it is better for the neighborhood because it often results in a higher sale price. However, not all short sales are approved and not all short sales result in a deficiency waiver. If you are considering a short sale, it is important to discuss the matter with competent legal counsel.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a deed instrument in which a mortgagor conveys all interest in a real property to the mortgagee to satisfy a loan that is in default and avoid foreclosure proceedings. It offers several advantages to the mortgagee: (1) it releases her from all or part of the indebtedness; (2) it avoids the public notoriety of a foreclosure proceeding, including advertisement in newspapers, listing in public records, etc.; and (3) it is better for her credit rating. If you are considering a deed in lieu of foreclosure, it is imperative that you discuss the matter with an attorney.
Both short sale and deed in lieu of foreclosure are most often preferable to foreclosure. This is because a foreclosure can result in a large deficiency balance which the mortgagor can sue on and get a judgment against you. With a judgment, the mortgagor may be able to garnish your wages, place liens on your property and levy your bank accounts.
Potential Tax Implications of Short Sale or Deed in Lieu of Foreclosure
If a mortgagee forgives all or part of a debt as part of a short sale or deed in lieu of foreclosure, the mortgagee will likely receive a 1099-C ("Cancellation of Debt") form. If this occurs, you may need to include the forgiven amount as income for tax purposes. To avoid this, you should look to the following:
Mortgage Forgiveness Debt Relief Act of 2007
You may qualify for an exclusion from tax liability resulting from cancellation of debt income if your short sale or deed in lieu of foreclosure deficiency was forgiven between 2007 and 2013, and if you can meet the requirements of the Mortgage Forgiveness Debt Relief Act of 2007. This Act allows taxpayers to exclude certain types of forgiven debt from their taxable income, as long as the forgiven debt was used to: (1) buy, build, or substantially improve a principal residence, or (2) to refinance debt incurred for those purposes. You can only exclude $1 million of forgiven debt, or $2 million if you are married and filing a joint tax return.
Bankruptcy
Debts discharged in bankruptcy are not considered taxable income. Sometimes bankruptcy cases are filed solely to avoid the tax implications of a short sale or deed in lieu of foreclosure transaction.
Insolvency
If you are “insolvent” (meaning your total debts are more than the fair market value of your total assets) at the time that the debt is cancelled, the forgiven debt may not be taxable.
In conclusion, short sale and deed in lieu of foreclosure offer attractive alternatives to foreclosure in many instances. Beware of pitfalls such as tax implications. It is highly advisable that you contact a competent attorney to discuss these matters should you be in a situation that warrants the use of these options.
The above information is for informational purposes only and does not constitute legal advice. If you have questions or comments, feel free to contact me by visiting my website at www.nagerlaw.com.
Overview
Short Sale
A short sale is the sale of a real property for less than the total debt balance remaining on the property, including mortgages and other liens. In a short sale transaction, the seller or mortgagor (i.e. borrower) negotiates with the mortgagee (i.e. the lender) and other lien holders in order for them to accept the proceeds from the sale in exchange for releasing the mortgages and other liens on the property. Short sale is often preferable to foreclosure because: (1) it can and often does result in a deficiency waiver, whereby the lien holders will cancel any debt that the mortgagor would have otherwise owed after the transaction; (2) it has less of an impact on a mortgagor's credit score; and (3) it is better for the neighborhood because it often results in a higher sale price. However, not all short sales are approved and not all short sales result in a deficiency waiver. If you are considering a short sale, it is important to discuss the matter with competent legal counsel.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a deed instrument in which a mortgagor conveys all interest in a real property to the mortgagee to satisfy a loan that is in default and avoid foreclosure proceedings. It offers several advantages to the mortgagee: (1) it releases her from all or part of the indebtedness; (2) it avoids the public notoriety of a foreclosure proceeding, including advertisement in newspapers, listing in public records, etc.; and (3) it is better for her credit rating. If you are considering a deed in lieu of foreclosure, it is imperative that you discuss the matter with an attorney.
Both short sale and deed in lieu of foreclosure are most often preferable to foreclosure. This is because a foreclosure can result in a large deficiency balance which the mortgagor can sue on and get a judgment against you. With a judgment, the mortgagor may be able to garnish your wages, place liens on your property and levy your bank accounts.
Potential Tax Implications of Short Sale or Deed in Lieu of Foreclosure
If a mortgagee forgives all or part of a debt as part of a short sale or deed in lieu of foreclosure, the mortgagee will likely receive a 1099-C ("Cancellation of Debt") form. If this occurs, you may need to include the forgiven amount as income for tax purposes. To avoid this, you should look to the following:
Mortgage Forgiveness Debt Relief Act of 2007
You may qualify for an exclusion from tax liability resulting from cancellation of debt income if your short sale or deed in lieu of foreclosure deficiency was forgiven between 2007 and 2013, and if you can meet the requirements of the Mortgage Forgiveness Debt Relief Act of 2007. This Act allows taxpayers to exclude certain types of forgiven debt from their taxable income, as long as the forgiven debt was used to: (1) buy, build, or substantially improve a principal residence, or (2) to refinance debt incurred for those purposes. You can only exclude $1 million of forgiven debt, or $2 million if you are married and filing a joint tax return.
Bankruptcy
Debts discharged in bankruptcy are not considered taxable income. Sometimes bankruptcy cases are filed solely to avoid the tax implications of a short sale or deed in lieu of foreclosure transaction.
Insolvency
If you are “insolvent” (meaning your total debts are more than the fair market value of your total assets) at the time that the debt is cancelled, the forgiven debt may not be taxable.
In conclusion, short sale and deed in lieu of foreclosure offer attractive alternatives to foreclosure in many instances. Beware of pitfalls such as tax implications. It is highly advisable that you contact a competent attorney to discuss these matters should you be in a situation that warrants the use of these options.
The above information is for informational purposes only and does not constitute legal advice. If you have questions or comments, feel free to contact me by visiting my website at www.nagerlaw.com.
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