shortsale - tax concern?

Question

a home i used to live is going to be shortsale. my realtor said the 1st lender verbally told him that they won't be 1099 on me for the difference. there are 2nd loan into this home and i'm afraid the 2nd loan might do.

Will I be taxed eventually...?

Since other home is to be foreclosed (rental property in Maryland), I am seriously considering to spend about $2000 for bankruptcy lawyer.

Advice please! My fear is the 1099c consequences...

Answer 1

In a short sale situation, what happens is you are sent a 1099 for any debt forgiven, this is money they are letting you off the hook for so it will be considered income to you, Even if you file a chapter 7 on the debt, you have to keep in mind it is very hard to do nowadays with all the new bankruptcy laws and they may counter you to a chapter 13, which means you have to pay back all the debt you owe anyhow, so either way unfortunately you will pay money, A chapter 7 you basically have to show proof there is no way to pay back the bad debt owed, and you will have to owe more then just a mortgage. I know this is not what you want to hear, but taking on debt means taking on responsibilty, the lender is going to write off the debt you owe them so they have to 1099 you for it

Answer 2

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RE Shortsale - tax concern?

a home i used to live is going to be shortsale. my realtor said the 1st lender verbally told him that they won't be 1099 on me for the difference. there are 2nd loan into this home and i'm afraid the 2nd loan might do.

Will I be taxed eventually...?

Since other home is to be foreclosed (rental property in Maryland), I am seriously considering to spend about $2000 for bankruptcy lawyer.

Advice please! My fear is the 1099c consequences...

Answer 3

So you're doing a short sale on a first and second mortgage, correct? The 1st won't 1099 you and you don't know if the 2nd will or not, correct?

First of all neither the first or the second HAS to 1099 you. I do short sales all of the time and it is actually rare this ever even happens (I have had 1 lender, 1st Horizon, insist on a 1099). But it is a 50/50 chance right? So what happens if they do?

The second should be smaller than the 1st. I'll assume for an example, the second is for 25K and the short sale buyer is giving them 5K. That leaves a difference of 20K that you would, not have to pay taxes on, but would become part of your taxable income.

So, let's say your taxable income is 50K. Your taxable income would become 70K. But you can still reduce your taxable income through all of the other deductions you would normally have such as your standard deductions, dependant deductions, mortgage interest, business expenses, medical expenses, depreciation, etc.

So, you're not going to pay 30% of 20000 or 6000 dollars. You'll only be paying the tax liability based on your bracket on your total taxable income.

For instance, this is from the 2006 tax tables: If taxable income is over 15,100 But not over $61,300 The tax is: $1,510.00 plus 15% of the amount over 15,100.

I don't know what you earn but as long as you don't exceed 61,300 between you and your husband (after deductions) you'll only be taxed at the 15% bracket.

I wouldn't let the 1099 stop me from doing a short sale. As far as a BK goes if you do the BK and the homes are included they can't 1099 you or seek a deficiency judgment for any of it. No, you can't include tax liabilities in a BK but there are no tax bills yet, and won't be until after april 15th of the year following the year you do the BK. If your BK discharges this year you won't have to do squat until April of 08.

I'd do the BK and walk away from it all before I went through foreclosure.

Answer 4

Bankruptcy will not stop a 1099 or the taxes due on it, since taxes are exempt on a bankruptcy, and these taxes will be a little over 30% (treated as a bonus) of what you owe. If they are not giving you a 1099, then they will be going after you for the difference of the sale, and the amount owed, either way you are in debt.