Short sales in South Florida are still going strong!
We are writing this short sale series- Busting the Myths and misinformation out there regarding short sales.
Short Sales- Palm Beach County Florida- Myth #1 Busted
Short Sales- Palm Beach County Florida- Myth #2 Busted
You may hear that you will or will not get a 1099 after your short sale. Let's get the facts straight on the dreaded 1099! 
President Bush signed into law the Forgiveness Debt Relief Act in the latter part of 2007.It has been extended to the end of 2012.
The forgiveness act states that if you live in your home for at least two out of the past five years and this home was your primary residence (in the state of Florida that would be your homesteaded property) then you will not have to pay on the deficiency part and that part will not be taxed as income.
You will still get a 1099 from your lender.
If you are doing the short sale on an investment property or on a second home, you do not fall in the Forgiveness act and the loss will be treated as income according to the IRS. It will be up to you and your accountant to prove whether you are insolvent or not and what losses you will be able to offset.
This is where most people get confused. If you don't have to pay taxes on the loss, why are you going to get or why did you get a 1099 anyways?
Because the lenders are required by IRS law to issue 1099 all the deficiencies on short sales.
It is then up to the taxpayer to bring the 1099 to their accountant or attorney and have it exempted with the forgiveness act.
The lenders are not going to divide up the short sales into two sections; those that have to pay on their 1099s and those that don't.
The short sale lenders 1099 everyone and then it is up to you to find out the category you fall into.
Calling the short sale lenders and threatening them demanding that they do not issue your client a 1099 will be a waste of energy on your part. If it was me, and I had a choice to do what the IRS tells me to do or to do what you tell me to do, well, that is a NO brainer. Sad, but true.
For more information about short sales read our series at Short Sales Florida.
Contact Nestor Gasset and Katerina Gasset, CIPS, Realtors®, International Properties and Investments, Inc. Licensed Realtors® in Florida at 561-753-0135 to list your property for sale or to purchase a property in Wellington, Royal Palm Beach, Loxahatchee, Lake Worth, Hypoluxo Island, Lantana, West Palm Beach and the rest of Palm Beach County Florida and Port St Lucie Florida. We are accepting referrals.
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Disclaimer:The information provided herein is supplied by several sources and is subject to change without notice. Wellington Homes Blog does not guarantee or is any way responsible for its accuracy, and provides said information without warranties of any kind, either express or implied. Entries on Wellington Homes Blog represent the opinions and ideas of the author(s). Wellington Homes Blog does not express the views of International Properties and Investments, Inc or those of the broker.
Copyright © 2009 By Katerina Gasset, All Rights Reserved.*Short Sales South Florida- Fact vs Fiction- Myth #3 Busted!*
Short Sales South Florida- Fact vs Fiction- Myth #3 Busted! was first published on South- Florida-Luxury-Living.com.
Nestor Gasset and Katerina Gasset- Realtors®, CIPS, ABR, SFR, GRI, REOS
Katerina, there are so many fine details like this one - that is why it is important to work with an agent who has understands the process. Great series!
I do a lot of short sales and this advice is right to the point. Thanks for posting.
Thanks Katerina for the insight on 1099. I have just completed a short sale cert program and it has also stated same fact. There is so much toe a know about short sale I know that each case is so different and I will be a great learn lesson for me...
Doing my short sale homework - thanks for the info, Katerina.
Katerina,
It was a very flattering feeling after reading your post that I knew that, and knew it right. Does not happen very often.
Thank you for a terrific post
Hi Katerina.....I do not deal with Short sales in my part of the World, Victoria BC Canada, but if I did you would be the person I'd call.You give Great Explanation in your Blogs about dealing with and selling Short Sales in Florida.
Cheers, thanks for sharing your knowledge of Short Sales.
Great stuff. However, I have had clients never get a 1099 after a short sale.
Katerina - As always, you are a constant source of good information when it comes to short sales to help both homeowners and agents.
Katerina, Thanks for another well written and informative post.
Nice post but a bit technically wrong. There is no such thing as a deficiency on a short sale. We find realtors ALWAYS miss this. Or get terms interchanged.
Forgiveness of Debt and a deficiency are two separate and distinct situations and the terms do not mean the same thing whatsoever and the distinction is VERY..VERY..important.
A short sale is a negotiated settlement, short payoff on a mortgage. PAYOFF. When a short sale is completed, the bank issues a SATISFACTION of the mortgage AND RELEASES the borrower from all obligation. Once a Satisfaction of Mortgage is filed and the Release of Mortgage is obtained, there is NOTHING from which a deficiency JUDGMENT can be obtained. The mortgage has been SATISFIED and the Borrowe RELEASED.
In this instance a homeowner may get a 1099 and may be liable for taxes on the debt which was forgiven.
However, if a home is actually foreclosed, and the bank sells the home as a REO and they sell it for less than what is owed, then the bank, in certain states, can obtain a deficiency judgment for the balance. In Florida it's actually written in the Final Summary Judgment of Foreclosure.
Now here's the big difference MOST realtors don't grasp and have a problem relaying to their clients.
Let's say that the mortgage balance with fees and costs is $300,000. The short sale is completed on the house for $200,000. The amount of debt forgiven is $100.000.00. The 1099 , if issued, would be for $100,000.00. Does this mean the homeowner owes the IRS $100,000.00..NO OF COURSE NOT!!
This is treated as ordinary income in most cases and the homeowner would have to pay taxes on this new found "income" according to their tax rate. Let's say they are in a 33% tax bracket...then they would owe the IRS $33,000 theoretically...I say theoretically becasue there are a NUMBER of maneuvers and strategies that any half decent accountant can do to rduce this IRS debt.
Now..on the other hand...the same house is actually foreclosed on by the bank. Same $300,000 outstanding debt, same price on re-sale of $200,000.00 ..now the bank has what is termed a deficeincy of $100,000.00. Based upon their Final Summary Judgment ins some states, they can simply go back to Court and they are entitled to a DEFIECNCY JUDGMENT for the ENTIRE $100,000.00!!
So as you can see...there is a HUGE difference here. By the way..check with your state, but here in Florida, this judgment, once certified, has a potential lifespan of twenty years and will continue to grow as statutory interest is applied and compounded while not being paid.
Other than bankruptcy and expiration this $100,000 judgment will continue to grow and grow over the years.
So when talking to a homeowner which situation is better to be in.
Real estate agents need to know the difference. There is a HUGE difference.
Regards,
Barry Cunningham
Real Estate Radio USA
Short Sale Video Course
Wonderful reminder for short sellers. Hopefully, short sale listing agents will give their seller/clients this information.
Sadly, many tax payers who prepare their own returns will not know to follow this procedure.
I always tell my clients in a short sales to expect one no matter what and that they should consult an accountant to find out what liabilities they might have ...also might be a good idea to talk to an attorney if you haven't employed one.
Katerina - Great post and great discussion ! Love your series here as far as myth busting for short sales.
Are you still doing that twirl dance when a short sale approval letter comes across the fax machine ? We learned that dance from you ! ~ Chris
As always, great stuff. I have seen contradicting info her on the Rain. Thanks for setting the record straight.
Short sales can be complicated only if we allow it. .
it's a simple process if you have all your facts straight.
If we are advising clients for such a important move in their lives. . we all should get all our facts straight with education. .
Great post, we have a client dealing with this in another state right now. Good info as always.
Great information, this will help me clearly explain this issue.
I love this series -- very informative and easy to understand. Good job!
Barry- I am sorry, but you are wrong. You are in the state of Florida. So am I. Florida is a deficiency state. I have gone through great lengths with our attorneys on this matter and with the legal department at Chase. While on short sales the lenders are not going after the deficiencies, state law permits the legal premise that the shorted lenders unless they give written waivers to their rights to deficiencies that the shorted amount may be sought within 5 years after closing as a deficiency.
The other thing is that there are agreed upon deficiencies all the time in short sales. There are situations where the lender and homeowner have an agreed upon deficiency which after the lien release, they can agree on terms to pay that off or take their chances that the lender is not going to pursue the deficiency.Most of the time this comes into play with second mortgages and PMI companies.
I have in my possession acceptance letters directly from Chase to homeowners, Citymortgage to homeowners, and PMI companies to homeowners wherein they state they have NOT given up their right to pursue a deficiency in the state of Florida.
We are seeing more and more that the lenders are NOT ALL giving fully satisfied and paid. Some do, some don't. Some say it is paid LESS THAN AGREED. The reporting of fully satisfied in essence is good cause to argue the case that this language does not permit the lender to seek deficiency, however, the reporting of the short sale for lien release purposes and for credit reporting purposes has nothing to do with the state statute. We can argue these cases all day long but at the end of the day until there is a class action law suit filed against the lenders and the statute of Florida is amended by legislation, it is what it is.
Now, have they been seeking the deficiencies? No, they have not. Many like Citymortgage's President told us; that would be immoral. But if the government nationalizes the banks, I would bet that they would be looking at all these books looking for ways to get money. This is their legal option. Katerina
WOW- I did not have any idea that this post would get featured! Usually my short sale posts don't get featured! Thanks to your AR Guys! Love ya'all!
Christopher and Stephanie- Of course we still do the Twirl dance when those acceptance letters come across our fax machine! Those are great times for celebrations! I am glad to hear that you do the dance!
RE: #19
My goodness. Can you imagine the IRS going through the books at City or any bank that closed a lot of short sales and sending out deficiency assessments to tax payers, after they have lost their home, destroyed their credit and who knows what else.
Well, yes I can.
wow Katerina good for you that you are spelling out the fact that you will get a 1099 in a short sale .. good for people to be aware of...
Nestor while it may be comfortable to say that I am wrong here in the warm bask of Active Rain...would you care to debate this in an open forum for more experienced short sale executors to hear?
You wrote..."We are seeing more and more that the lenders are NOT ALL giving fully satisfied and paid"...my response to this is then whoever is handling the negotiations, with all due respect, is not doing things right.
We have NEVER..and I mean NEVER, had ANY lender in ANY state EVER give ANYTHING LESS THAN FULL SATISFACTION. That would actually be the antithesis of a short sale.
Maybe you have created some new form of hybrid transaction but it sure isn't a SHORT SALE by the classic definition. We would NEVER have our clients accept anything other than full satisfaction and a full release.
It's all in the negotiation. What you describe NEVER happens in our deals and never happens in any deal that we know of. We have been successfully executing short sales for nearly 7 years, even before they became "cool".
Not once has anything short of a full satisfaction and release EVER been proposed to a bank. And never anything LESS than full satisfaction would ever be accepted.
I get amazed when I see some of the stuff that is written here. I don't mean any disrespect, but geez...it's just not right!
I'm in the sorry state of having to explain to California short sale sellers that although the home may be owner occupied, so the federal government is not going to count the mortgage debt forgiveness as income, the lovely state of California may, so they need to talk with an accountant to figure out how to handle it. Some short sale sellers in Sacramento have been able to work around this taxation with the state, but only because they hired a smart accountant.
Parked.
I know little about this issue, but to look forward to the continued discussion.
Great article! My office does quite a few short sales. We have agents working on their Certified Distressed Property Expert designation. Short Sales pay better than banked owned with no referral fees back to the bank.
Great Information as I am embarking on going for more short sales.
I will Series One and Two so that I can be caught up.
Katerina,
Our last short sale was with the company that got the rights to the notes from National City. At the very beginning we agreed that they would have the language that they will not go after the Seller for any money AFTER the closing. They said that they would give a 1099 but would not sue the Seller for the balance or anything else.
Well, when the papers finally came, I got the call from the attorney, who was negotiating with them, and she said that there is nothing in the language to protect the Seller from the demand of the Lender. Well, it took us a week of confrontation to have them finally agree to this language, And in the meantime, they demanded money in exchange of waiving their rights.
We stood strong, and they finally provided the document that Sellers attorney found satisfactory.
Great job
Katerina, I take the cheap way out. I don't give legal or tax advice to my sellers. I refer them to an attorney and an accountant. Some hire them and some don't but ALL sign off that I advised them to and that they understand my job is to sell the property and get the lender to accept it.....nothing more.
My personal opinion is that you and Barry are both partially right. But as John Travolta in Michael says..."It's not my area" :)
I do know this though whether or not a person receives a 1099 has no baring on if they owe taxes or not.
Good topic for discussion Katerina.
And why is Barry being so nice?
I thought that it had to be purchase money not just primary residence to not be counted as income?
Hey BB..you make me laugh..You KNOW I'm right...but I have to be a bit nice or they will kick me off of Active Rain.
The AR police don't like me beating up on AR members...it's a shame that calling someone out and telling them to back up what they say is considered beating them up...but c'est La Vie!
So I leave that for our blog..where we took this matter and exponded upon it and let the people know how wrong and misrepresentative this info that Katerina posted is.
There...I was my usual self. It's on the front page...check it out..it also got picked up by Reuters.
Just telling it like it is.
When your client gets the 1099C from the lenders it will be a number that they are not expecting since part of the calculations include the costs associated with the foreclosure or short sale expenses. They could tack on lawyer fees, court costs, commissions, ect..ect. In a short sale for a primary home you can negotiate to have the lender renounce their right to pursue a Deficiency. In short sales for an investment home, you will rarely get the same consideration.
When your clients get a 1099C and it's their primary home they will need to fill out IRS Form 982 in order to negate the 1099C. Prepare your clients and let them know that it's coming. It might not be this year or next, but it's coming. Some lenders are holding off on sending out the 1099C in order not to forfeit their ability to pursue a Deficiency. There are circles that say it doesn't matter, you must pay the taxes and they can still come after you for the Deficiency, but the IRS does not address this matter specifically.
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Sidney- Thank you for your further explanation in regards to deficiencies and 1099C info. Of course, I was not going to go into all the details in a post for consumers that I am just getting the basic myths busted. My information is direct from my experience with lenders and our clients' attorneys. I have a very good attorney that we work with who refers all of her short sale clients to us and she keeps us up to date on legalities.
Barry- We have one going on right now where there there are two loans involved. One is a HELOC. Us and our attorney have been able to negotiate the terms down to a release of the deficiency only if the homeowner contributes to a cash settlement on the HELOC, he does not want to do so, so he said he would rather take the deficiency. He has well over a million dollars in savings and owns several properties. He has excellent credit and lots of open credit lines with low balances. The HELOC company is saying no matter what we negotiate they want something. Either cash or deficiency. The cash outlay is very low, for a 170K HELOC we had the cash contribution down to 7,000, no interest, payments of 100 per month. His first of over 800K is being totally satisfied and cleared. No deficiency. Homeowner chooses deficiency for the HELOC. His attorney has not seen anyone go after these deficiencies. So there are deficiencies. Katerina
Barry- In my post; there is nothing that is misinformation. I have checked with my legal counsel. This is a public post with information for our clients and prospective clients. I would not go on one of your posts and try to humiliate you in front of your clients and prospects. I think it shows our true colors when we do hack each other down instead of lift each other up. I don't know why you are even on Active Rain if you don't like the it here. Katerina
Jon- That is a great outcome! Thanks for sharing. We just got a total free and clear with a PMI company tha started out being really hard nosed and would not budge off their wanting a promissory note. We finally got them down to ZERO! It takes a lot of negotiations and being strong in them.
Katerina,
This has been a very interesting "read". Where can I go here in California to find out how the rules are here? I read so much on AR and as this blog proofs, every state can have its own "fine print" set of rules. I wouldn't want to ill-advise my clients or create a controversy.
Katerina - I have not had any lenders pursue "deficiencies" yet, even with fuzzy letters from BOFA that state the lien will be released but the collection of the deficiency is undetermined. Maybe there will be a slew of pursuits in a few years, one never knows. I wonder if the deficiencies on some seconds are not always fully released for the lenders' "books" to appear to have accounts payable? Accounting is not my area. I refer my sellers to the IRS website link which answers questions on debt cancellation and the IRS definition of "insolvency". Like Bryant, I qualify that statement with "you should talk with your accountant". Good discussion.
Check the link below in reference to short sales and deficiencies. The author also has many more posts on short sales that explain the important difference between a mortgage and a promissory note.
http://activerain.com/blogsview/971528/SHORT-SALES-PRIMER-BACK-TO-BASICS-UPDATED
Anja- Yes, California is a non judicial, but also non deficiency state for your primary home. You should talk to an attorney in California who deals with this and has experience with it. Just as not all realtors are the same either are attorneys.
Wendy- Chase also has fuzzy wording. We just had a seller called within 30 days of closing for the deficiency on his HELOC. That was a first, that was WAMU. I guess we will see as the books start to get looked at. Not all accountants even know what a short sale is or how the IRS treats it with over 60,000 pages in the IRS code, not even accountants can know it all, so I say to our clients, to make sure they get an accountant who does know about this part of the code.
Mike- Richard is in our area, we read his posts on Active Rain and respect his content. Thanks, we write our short sale posts to educate the consumer to call us to list their property if it is something they think they should do.
Thank you for sharing your wealth of information with us. We are really just starting to have to deal with this situation in our area. I have been doing research any where I can and it seems like the deeper I get into it, the less is certain. Seems to be no hard and fast guidelines or even clear cut legal duties and consequences. I printed out your steps and am studying it carefully.