Short Payoff Questions & Answers

Helen:

Thanks for considering me for your short sale needs. 

Is your property listed with a real estate agent?  The agent is the one that is supposed to know this.  That is why they are getting a commission.

This subject is a not simple but I will try to answer in a paragraph.  This is not legal advice.  Just personal opinion.

A sale in which secured creditors are paid less than what they are owed is called a "short payoff".  There are two solutions to a short payoff.  A true "short sale" and a "release of lien." 

In the release of lien the bank lets you sell for less than what they are owed but you still need to pay the difference.  There is no loss to them.  Since they are not forgiving you debt you have no tax consequences. However, you can no longer discount the interest on the loan from your taxes because the remaining debt is no longer a real estate loan.

In a true short sales the bank lets you sell the property for less than what they are owed and forgives you the balance.  In this case the creditor sends you a 1099C.  Basically you have earned income by debt forgiveness.  So you will need to pay taxes on the amount you are forgiven.  To deal with this work with a real estate savvy CPA.  Generally, if the property is your primary residence and you are insolvent you can get away with having to pay those taxes.  Look at IRS form 982.  The president passed a law about this as well.  That law is mostly a PR move because what it say has existed for a very long time. 

Often creditors do a combinations short sale – release of lien.  Basically they forgive part of the debt and you need to pay the rest.  That may be what you are facing.  If you don’t have the $10K ask them to get you into a payment plan.  They may want more money but it will get you out of the situation.  If you get foreclosed by the first mortgage holder, the second mortgage the creditor will most likely not be paid off at the trustee sale.  You will not be forgiven the debt if you are foreclosed because the HELOC is not purchase money.  You got that money after you bought the property.  Most likely they will chase you for the money through collectors. Not good.  Because of this, most of the time you are better off with a short sale than with a foreclosure. 

Helen, hopefully this helps.  Please consider this just a plain opinion.  Not legal advice.  I will post this in Active Rain without names.

Oscar

At 10:28 AM 9/4/2008, you wrote:

You’ve received a contact message from your Contact Form on the ActiveRain network.

Message details: From: Helen xxxSubject:  Short sale in CA

Hi,I have seen your messages on the forum. I am currently trying to get my banks to approve my short sale via real estate agent.My second lender (heloc) said they still want $10,000 cash from me even if the sale goes through.I need help and guidance with tax consequences, options etc.Do you have anyone in San Francisco, CA area to assist me?Thanks