Foreclosure vs. Short Sale

WE are experiencing a high number of homeowners considering either letting their property go into a foreclosure or short selling their properties. I have had a number of caller who ask for my advise and I would always try and find out why they got into that situation. Hoping to find the cause of their current mishap, guess what majority of the reasons are because of "Bad Loans" and Bad Lenders". I have been in this business for more than 20 years and I have never seen so many homeowners being charged 20-30 K thousands of dollars in fees. This is outrageous and yet crippling because we cant do anything about it now.

Who is to blame, unethical and dishonest lenders who has no conscience and care only about their own pockets. Now, you know how to be careful right ? Very expensive lesson for all of you, for some learn from this.

A "short sale" is selling the home for less than the mortgage balance and trying to get the lender to forgive the unpaid balance..

A reason for debtors to consider a "short sale" instead of a foreclosure is to try to protect their credit history.

ow are foreclosures (and deeds in lieu of foreclosure) taxed? An important consideration in the results of a foreclosure (or a deed in lieu of foreclosure) is whether the debt is "recourse" or "nonrecourse". If the debt is "recourse" ( most mortgage from cash out refinancing), the debtor is personally liable for the debt. If the debt is "nonrecourse"( most mortgages used to purchase a residence), the debt is only secured by the property, and the debtor is not personally liable for the balance.

You should consult with an attorney to determine the status of your mortgage.

Tax relief enacted for recourse mortgage on principal residence debt forgiveness. Congress has passed and President Bush has approved H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. (California has not conformed to this legislation. Check your state.)

What happens with a "short sale"? Short sales are taxed under the same rules as foreclosures.

Recourse debt cancellation is not satisfied with the surrender of the property, so any debt not satisfied with the sale proceeds would be taxable as cancellation of debt income, except for certain "qualified principal residence indebtedness. See section on "tax relief", above. (Rev. Rul. 92-99, 1992-2 CB 518. Also see Treasury Regulations Section 1.1001-2(a)(2).)

For non-recourse debt short sales when the seller and buyer require the cancellation of the debt by the lender as a condition of the sale, the debt cancellation is included in the sale proceeds, like for a foreclosure. (Briarpark v. Commissioner, 5th Circuit, 99-1 US Tax Cases 99-1 ¶ 50,209, 1/6/1999; T.C. Memo 1997-298, 6/30/1997. Also see Treasury Regulations Section 1.1001-2.)

Therefore, a "short sale" can be a viable alternative to a foreclosure for debtors with nonrecourse debt and who qualify for the exclusion from income of the gain from the sale of a principal residence.

What if the fair market value of the home has dropped after purchase? If the cancellation of debt was for "qualified principal residence indebtedness", it will be excluded from taxable income and be subtracted from the tax basis of the residence.

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Please contact your CPA for more detailed explanation and your Attorneys. Go to www.irs.gov and look up your tax implication.

For any other question, please call me at 562-697-7028 or write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it

( www.asianjournal.com )

( Published on February 25, 2009 in Asian Journal Los Angeles p. B3 )

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