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Miami Short Sale Tax Implications

Mortgage DebtSeveral of my clients have been sellers of distressed Miami homes. Homes where the owners were no longer able to keep up with the mortgage payments. In some cases, short sales were good options. In others, a short sale was not the solution and the owner allowed the properties to be foreclosed on.

Why would someone who is facing a foreclosure in Miami not want to get out of it if possible? The simple answer is tax implications. Allow me to explain. If you own a property that is facing foreclosure and you work out a short sale agreement with the lender, that lender is going to give you a form 1099 for the amount that was short to pay the loan off completely.

For instance, let’s say the loan on the house is $250,000 and in today’s declining housing market you can only get the home sold for $175,000. After you factor in closing fees, let’s say the bank only nets a total of $155,000. Well, the bank has then forgiven you a total of $95,000 ($250,000 mortgage balance less $155,000 netted from short sale of house). The bank will then issue you a form 1099 at the end of the year in the amount of $95,000, which means you have to report that as income when you file your income tax returns.

The problem is a lot of people facing foreclosures may seek help from professionals who don’t have a lot of experience in doing them and may not even know that the homeowner will be hit with a 1099. They’re not hiding information, they just don’t know any better. But ignorance is not bliss in this case. An unsuspecting homeowner isn’t likely to have the funds to pay the taxes due on this forgiven mortgage amount. I’m no tax accountant, but on my scenario above, I would guess that taxes could be due in the neighborhood of $15,000 – $20,000.

Well, here’s the good news. For some anyway. If you lived in the home (in other words, it was not an investment property), you may be able to get tax relief from the IRS when faced with a 1099 on a forgiven mortgage debt. Certain criteria must be met, but the relief is there. It’s part of the Mortgage Forgiveness Debt Relief Act of 2007, which was enacted December 20, 2007. This Act was put in place to help people facing mortgage problems in their primary residences. Again, this is not for investment properties. Visit the IRS page to get more details about it.

I did have a client who had 6 investment properties and he did not do short sales because he did not want to get left at the end of the year with taxes to pay on the amounts forgiven. In his case, he opted for the foreclosures. Not a great option but he was grateful to me for explaining the 1099 thing. No one had told him that he would have to pay taxes on that amount. He thought he could just short sell them and be free of the whole mess. When I explained that it didn’t work like that he was dismayed that his options weren’t better, but he was grateful to me because he was now able to make an informed decision. Super REALTOR® to the rescue! Just kidding =) But I do take my work seriously and find extreme satisfaction in being able to help people with my experience.

If you’re facing a foreclosure contact a knowledgeable professional to discuss your options. That may include a REALTOR®, accountant, tax attorney or combination. You do have options. Find out what they are!

  1. Tim Ramsey

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

  2. Mike Harmon

    I discovered your homepage by coincidence.
    Very interesting posts and well written.
    I will put your site on my blogroll.
    🙂

  3. Riley Smith | Coconut Grove Realtor

    Maggie,
    I saw that you were on The Tomto’s “Vine” and wanted to check your site out. Great writing, and this post in paticular is excellent. I had no idea that owners of short sales would face tax implications.
    I’m adding you to my blogroll!
    Riley

  4. Matt

    After consulting with my accountant regarding investor owned short sale vs foreclosure I was informed that there will be a 1099 issued either way. If the short sale yields more than a sale at the foreclosure sale then there would be less of a 1099. Is that true?

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These articles are not intended to give legal or tax advice, and you should consult your attorney or financial advisor for additional information.

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