Short Sale, Foreclosure and Strategic Default

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Wednesday, May 23, 2007

Loan Forgiveness and your Tax bill

Considering a deed in lieu, a short sale, or some other workout? Has your advisor spoken to you about your other assets? Are you aware you could be selling thoses assets to pay the IRS?

In many instances the IRS currently considers loan forgiveness or Debt Cancellation to be income. See the following IRS publication on canceled debts...

http://www.irs.gov/publications/p525/ar02.html#d0e4790

Cancellation or forgiveness of a debt by a lender gets reported to the IRS. The IRS considers it INCOME.

A former homeowner may have to pay Income tax on amount the Lender reports as forgiven or cancelled. That income may move the former homeowner up to a higher tax bracket.

There are exceptions to the rule such as insolvency. Insolvency may be complicated and vary on a state to state basis.

I predict this area will cause more people to file a lawsuit against Real Estate Brokers in the next few years than any other area.

After a homeowner loses his house - will he be pleased when he gets a 1099 from the lender for say $50,000 dollars or more. The homeowner will call his his short sale "helper" and say how can this be, I lost money on that house. I never would have let you sell my house or negotiate that short sale if you had told me about this consequence.

And the Realtors says... how could I, I am not allowed to practice law. Or the Realtor says, I did practice law and I counseled you about tax matters and loan forgiveness.

The good news... Congess is considering a bill designed to protect former homeowners from the nasty consequence of loan forgiveness.

If you are currently considering a Pre-Foreclosure remedy or foreclosure. Speak with an attorney who can advise you on the tax consequences and what you can do to avoid them.

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