A Homeowner’s guide: Short Sales and preventing Foreclosure Pt4 (The ramifications)

Now that you now all the options available when facing a foreclosure or a short sale or the possibility of not qualifying for a refinance; I will tell you what ramifications or consequences could be expected when doing a short sale, deed-in-lieu of foreclosure or a foreclosure.

*Again, I need to disclose that to cover the specific legal consequences and tax liabilities you may face when doing a short sale, deed-in-lieu of foreclosure or a foreclosure, you need to seek the professional advice from a CPA and/or an attorney with experience on these fields.

Many lenders will ask sellers to sign a promissory note for all or part of the shortage realized after the short sale and may condition the sale upon the signing of this promissory note. If this is the case, the signing of the note gives the lender right to sue a seller if the note is not paid when due.

In California and other state like it, we have non-recourse loans. What this means is that the lender has no legal recourse to obtain a deficiency judgment against a seller for the loss the lender incurs after the property is foreclosed or sold as a short sale (*certain restrictions apply). With this protection, homeowners in these states may end up in a better situation than homeowners in other states.

In addition to the legal consequences there may also be tax liabilities as a result of a short sale or a foreclosure.

When a lender incurs a loss after a short sale or a foreclosure, the IRS requires lenders to submit a Form 1099c stating the forgiven amount. Sellers must report this amount forgiven by the lender as income and pay taxes on that income. But if a seller can legally prove insolvency or the loan is a non-recourse loan, the seller may not have to pay such tax.

[UPDATE Dec 20, 2007: Tax relief for short sales and foreclosures signed (Mortgage Forgiveness Debt Relief Act of 2007 H.R. 3648)]

[UPDATE Sept 30, 2008: SB 1055 California State Tax Relief Applied To Forgiven Mortgage Debt]

One final disclaimer, in order to understand completely the legal and tax consequences you may face when doing a short sale or a foreclosure, you are strongly encouraged to seek professional tax and legal advice from professionals with experience in these fields. A real estate agent or a REALTOR® cannot give you advice on these fields. By consulting with a professional, you stand a stronger chance of making the best decision for you and your family.

Following is a video briefly going over the ramifications when doing a foreclosure or a short sale.

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Regardless of whether you are looking to buy a regular home, buying a short sale, buying an REO property or considering selling your home as a regular sale or selling it as short sale or may be looking to invest in short sales or invest in REO properties, you can contact me and I can show you how you can make the best decision when buying, selling, investing or refinancing.

Before making an important decision as a short sale or foreclosure you must read these other articles from the “Homeowner’s guide to preventing foreclosure”:

Homeowner’s guide: Short Sales and Preventing Foreclosure Pt1 (The reality of a foreclosure)

Comments

3 Responses to “A Homeowner’s guide: Short Sales and preventing Foreclosure Pt4 (The ramifications)”

A Homeowner’s guide to preventing foreclosure Pt3 (Selling your home) : My Home is My Investment on September 17th, 2007 9:08 AM

[...] you jump to the decision of doing a short sale read part 4 of this Homeowners guide to preventing [...]
Learning from Our Mistakes: Co-Signing Could Lead You into Financial Trouble! : San Jose-Santa Clara County Real Estate UNCENSORED on September 12th, 2008 1:35 PM

[...] You have to remember that when you co-sign on ANYTHING you are in a contract and agree to accept legal and financial responsibility if the main account holder defaults on the loan. You not only run the risk of ruining your credit if they miss one payment or two but if they default on the loan all together, the lender will most definitely go after you because they know you have more assets and are more financially responsible since the main singer needed you to qualify for the loan. Lenders could garnish your wages and make you pay for legal fees on top of all the late fees the account may have already accumulated and in the case of a mortgage loan the consequences are even greater. [...]
Foreclosure scams grow rampant in todays Real Estate market : San Jose-Santa Clara County Real Estate UNCENSORED on October 10th, 2008 2:10 PM

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