Short Sale And Taxes
I haven't done a short sale yet but am getting close. I've been told that when a bank accepts a short sale offer and the deal is complete that the lender will then send the former homeowner a 1099 for the amount of the debt that was forgiven.
First question:
Is this true??
Second Question?
Should the homeowner be told this?
I feel like I should inform the homeowner
that there may be tax consequences but that by informing the owner, I could blow the deal out of the water. With that said, I still feel like I need to inform the homeowner of the potential tax consequences.
Third question:
Of the people on this board that are doing short sales, how many of you inform the homeowner and how many don't.
Thanks in advance,
Bill
Yes, it's true that the IRS views forgiven debt as income. Sometimes, that income is taxable. Sometimes, and in the majority of scenarios, the income is exempt from tax. A Lender who forgives debt sends a 1099 to the former homeowners with the indicated debt forgiveness.
You should alert the Homeowner to the possibility of an exposure to a liability to pay income tax. I do. I've never had a problem yet.
Hi Bill,
First question: Is this true??
Answer: YES
Second Question? Should the homeowner be told this?
Answer:
Without a Doubt! Not only should the homeowner be told of this by you, you should also have them sign a (cya form) that will verify that you went over this with them and the understood. Therefor, it would be very tough for them to come back on you later!
If you feel that you are going to blow a deal by telling them of possible tax implications, I would STRONGLY share with them that if they let the house foreclose and the banks loses money, they are going to come after the homeowner for the deficiency of up to tens of thousands of dollars. Those are their only options . . . which one do you think they will choose. Also, in some situations the homeowner wont be liable for the tax consequences even if the bank does send them a 1099. Share with them that if they want to know the details of the possible tax consequences, to visit with an Accountant of CPA.
Third question:
Of the people on this board that are doing short sales, how many of you inform the homeowner and how many don't.
Answer:
For those of you who are not, you are walking a very fine line. I hope none of you answer that you hide this fact from the homeowner!
Best of Success!
BAMZ