Gardi, Haught, Fischer & Bhosale LTD.

Short Sale Taxes In; Debt Forgiveness Out!

By Gardi, Haught, Fischer & Bhosale LTD
October 13, 2014

When a homeowner sells their home for less than what is owed, it’s called a short sale. A few years ago, nearly every neighborhood had their share of foreclosed or “short sale” homes. There were plenty of sellers who reluctantly sold at a loss, but at least they had one consolation—the debt owed on the house, which was forgiven by the bank, was not taxable, thanks to the Mortgage Debt Relief Act of 2007.  During this term, when short sales were plentiful, Congress extended the Debt Relief Act. However, as the economy improved and the real estate market showed signs of recovery, the legislation expired. As of January 2014, sellers who receive debt forgiveness from their lender will now have to report the loss as “income” to  the government and will have  to pay taxes on the reported income.

For a seller, this can be considerable. For example, when selling your house valued at $200,000 for $100,000.  If the bank forgives the $100,000 owed on the house, you will need to pay taxes on the forgiven debt. You will receive a 1099 for the $100,000, and if you are in a 25% tax bracket, that’s a $25,000 tax debt added on for the year!

For sellers in this position, they may be tempted to pursue foreclosure to escape the tax. However, Illinois is a deficiency state, which means the bank can pursue the $100K owed on the property for a period up to 20 years. Pursuing a second mortgage is even more complicated, since the mortgage debt becomes unsecured after foreclosure and possibly liable to a judgment if the creditor decides to pursue the debt. Either of these situations can put a seller’s credit at risk.

Short sales, despite their tax implications, are often the best way to go. Somehow, the debt must be paid and the only way to reduce what you owe is to seek bank forgiveness and pay the taxed income instead of the total debt owed. An experienced accountant may be able  reduce your tax liability. At Gardi, Haught, Fischer & Bhosale LTD, we can also help by facilitating the short sale process. We will:

*Work with the banks to minimize the debt from the lender

*Negotiate finances and make sure your hardship appeal is in order

*Make sure the bank understands your situation and consider you for the short sale program.

*Work to keep the realtor commission at 6% so realtors stay motivated to sell the house quickly at the best possible price.

Our Firm Has a stellar record working on short sales, Additionally, we do not require payment for our fees from the seller. We realize the homeowner is in a financial hardship.

If your house is underwater and you need to determine your next move, contact Gardi, Haught, Fischer & Bhosale LTD Ltd.  We can serve as your advocate to make your short sale as painless and stress free as possible. Call us today at 847-944-9400.

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