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Debt forgiveness: A potential pitfall of short sales

Posted by Jolenta Averill on Friday, February 12th, 2010 at 5:25pm.

Madison WI homes for saleThe biggest investment many people make is their home and in recent years that investment has turned sour.  Rapidly rising home values appeared to be a sure bet.  As home values went up and equity magically increased, many homeowners sought and were given second mortgages which left very little net equity.  

Like all financial bubbles, the inevitable crash has arrived.  A major cause was Wall Street's securitization of "sub prime" loans.  A great explanation can be found at CrisisofCredit.com.  As housing prices fell, and as homeowners lost jobs or had other financial problems, their second mortgages and high interest rate loans combined to make many homes unaffordable.

One option to avoid unaffordable monthly mortgage payments is a short sale.  A short sale occurs when the sale price of a home is not sufficient to pay off the existing mortgage(s).  A competent Realtor or short sale listing agent with experience negotiating short sales can help you arrange a short sale.

One potential pitfall of a short sale is the issuance of a 1099-C form by the lender.  A 1099-C reports forgiven debt to the I.R.S. Forgiven debt is considered as taxable income, unless certain exceptions apply.

The Mortgage Forgiveness Debt Relief Act of 2007, as amended by the Emergency Economic Stabilization Act of 2008, permits a taxpayer to exclude up to $2,000,000 (1,000,000 if married filing separately) of debt forgiveness if the debt forgiven was incurred to buy, build or substantially improve your principal residence.

Also under the Act, the cancellation of debt is not taxable if, among other reasons, the party is insolvent or the debt is discharged in bankruptcy.  IRC Section 108 makes debt forgiveness non-taxable only to the extent of the debtor's insolvency.  

This article is meant only as a basic outline of the applicable law and should not be relied upon without consulting with a tax expert or an attorney specializing in such matters. To discuss the possible tax and legal ramifications of selling your home short, please attorney Mark Borns at Borns Law or call (608) 255.7600.

Madison WI divorce and bankruptcy attorney

 

Borns Law is a Madison WI law firm that helps families with a wide range of personal and legal issues. Specializing in divorce, bankruptcy, and mortgage foreclosures, Madison attorney Mark F. Borns has been named by Madison Magazine as one of the top divorceand family lawyers in Dane County and has been AV Martindale-HubbellPeer Review Rated. As an experienced Madison WI divorce lawyer,Mark has the ability to help you maintain your dignity while protectingyour rights.

 

 

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Jolenta Averill, Principal
Lake & City Homes Realty
(563) BUY-SOLD

1 Response to "Debt forgiveness: A potential pitfall of short sales"

Divorce and Real Estate wrote: <!DOCTYPE html PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN" "http://www.w3.org/TR/REC-html40/loose.dtd">
<html><body><p>If you have previously purchased a short sale home, and you are now getting divorced then those payments that have skyrocketed in price may be overwhelming. This article certainly helps explain the pitfalls of that situation, and way to deal with it.</p></body></html>

Posted on Saturday, March 10th, 2012 at 4:07pm.

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