Short Sale

A typical short sale involves the sale of a property at a lower price than is owed on the mortgage. The bank is in jeopardy of loosing a mortgage, the homeowner is on the verger of losing the property; both parties are trying to avoid foreclosure. But what happens after the Short Sale?

After Short Sale, the banks are required by law to either file a judgment or send out a 1099 form to the former homeowner.

The Judgment
The judgment means that the former homeowner still owes the balance between the sales price and the mortgage amount. For example if the property was sold for $100,000 and there was a $150,000 loan, the $50,000 is still owed by former homeowner to the bank. This judgment will remain on record for 2 years and can be attached to another property and their new mortgage.

The 1099 Form
1099 form shows the amount the bank lost on a mortgage and should be reported as income on the former homeowner’s tax returns for that year.  The taxes must be paid to IRS, unless the property used in Short Sale was the homeowner’s primary residence. If the property was not the primary residence, taxes must be paid regardless of the fact that the homeowner took a big loss, including the loss of the property.

So, the bottom line is - for the Short Sale to be a complete success, the bank should provide the homeowner with a 1099 form (instead of posting a judgment) and the property has to be the homeowner’s primary residence. If it is not, other options should be considered. Before you decide, you should always seek the advice of your accountant (CPA).

In my practice, I have noticed (while putting a Short Sale together) that many people were not aware of the 1099 form; this includes vice presidents of the banks, title companies and many real estate agents. So please always seek the advice of your CPA and consider all your options carefully before making a decision.