Tag: taxes on short sales
Short Sales vs Foreclosures Monmouth and Ocean County Real Estate Attorneys
Throughout the ups and downs of the economic and real estate markets in the United States, many people have had to sell their homes due to financial distress.
One big burst of such sales happened between 2007-2009 during the Great Recession, and a resurgence of home sales for financial loss has occurred due to the Covid-19 pandemic and its effects.
When a homeowner is under financial duress and must sell their property for less than the amount due on their mortgage, this is called a “short sale.” During a short sale, the homeowner sells their property straight to a third party – not the bank – and all profits from the sale go to the mortgage holder. The mortgage holder then forgives the difference.
Short Sales During the Great Recession
Short sales were especially prevalent during the Great Recession, as home values plummeted. For example, a homeowner who bought their property in 2006 for $500,000 might have been faced with the need to sell when the stock market crashed in 2008, as they couldn’t keep up with their mortgage payments because, say, they lost their job; but due to the economic downturn, the home value had dropped to $450,000, and now they owed the mortgage lender more than the sale of the property would recover. Such a scenario is experienced by many during times of economic hardship, and the Coronavirus pandemic of 2020 is no different.
Why would a mortgage holder or lender agree to a short sale?
During a short sale, the mortgage holder or lender agrees to reduce the amount owed by the property owner, so that the owner’s debt is forgiven upon the sale of the house at the lower value. Why would a mortgage holder agree to wave thousands of dollars of debt instead of foreclosing on the house? Well, the process of foreclosure is both an extensive and time-consuming affair for a lending institution to undergo, and after completing the process of foreclosure, they must sell the house. Often the mortgage holder will cut their losses in finances under the “time is money” principle.
Whether or not a mortgage holder or bank allows you to complete a short sale and forgive the difference is entirely up to the bank. Again, because of the hassle involved with foreclosing, you may have some luck getting approval to make a short sale if the difference between the amount owed on your mortgage and what the house is valued at are not hugely different. During this time of pandemic especially, you may find that lenders are more willing to allow short sales.
How long will a short sale take?
Once the bank has allowed a short sale, however, there is a lengthy process to the actual completion of the house sale. “Short sale” is a misleading term. It means that the property owner has come up financially short – not that closing the sale of the house will take a short time. In fact, because the buyer must get approval from the mortgage holder of the buying price before negotiations can proceed, the process can take between four and nine months. All typical back-and-forth between a buyer and seller now includes the bank or mortgage holder as well. For this reason and the fact that there are many details that are unique to a short sale, it is important to have a real estate agent who is experienced in short sales, as well as a real estate attorney, if you are selling your house as a short sale. This guidance and legal support can be invaluable during a financially testy and complex time such as this one.
What about taxes on short sales?
So you’ve faced economic hardship and had to sell your house. Fortunately, the mortgage holder has agreed to allow you to short sell your house, and you’ve found a buyer. The $40,000 difference has been forgiven by the lender. All things considered, you’re really fortunate, right?
According to New Jersey law, the debt forgiven by the mortgage holder is considered taxable income to you. You must pay state and federal income taxes on this difference. You will have to fill out a 1099-C for your federal tax returns. The “C” in 1099-C stands for the cancellation of debt; federal law states that canceled debt is, for the most part, considered taxable income.
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At Bronzino Law Firm, our real estate attorneys are experienced in facilitating short sales for our clients across Ocean County, NJ including Brick, Jackson, Toms River, and Point Pleasant
To meet with an experienced member of our firm today regarding your home sale. To schedule a consultation with a member of our team today to discuss your case, 7328123102 today for a free and confidential consultation to discuss your individual needs and concerns.