Behind on Mortgage? Short Sale May Be a Solution But Be Aware of Uncle Sam
You are behind on your mortgage payments and your lender has stared the foreclosure process according to the rules of your state. When you take into account the principle amount of your loan along with the past due payments, interest and fees, you learn that you actually owe more than you can get if you sell your house. What do you do?
One option is for you, or someone on your behalf, to work with your lender to negotiate what is called a short-sale, where the lender will accept less than what you owe on your mortgage as payment in full. Great, you are able to save your credit by not having a foreclosure appear and the bank does not have the expense of foreclosing on the property and then managing it until they can find a buyer. Win-Win right? Maybe not because Uncle Sam is still there with his hand out, looking for the taxes he's owed on the money you profited when the bank accepted less than what you owed.
You are probably asking yourself "what profit? I didn't put any cash into my pocket" Under current tax law, when a bank agrees to take less than what is owed on a loan as payment in full, they are required to let the IRS know by filing a 1099-C form and you the homeowner are responsible for the taxes due on the discounted amount. Read this article from the Baltimore Sun for more information.
Homeowners who are considering negotiating a short sale need to know that there is a good chance that if they are able to strike a deal with the bank, they may still be responsible for the taxable amount of the difference. While a homeowner's initial reaction may be that they do not want to be on the hook for a $20,000 tax bill from the government, it is important to weigh that against the damage that a foreclosure on their credit report for years to come. If you have a large tax bill from the IRS you can always work out a payment plan - if you have a foreclosure on your report you will not be able to get on with your financial life for many years after.
