Short Sales  for Sellers

Short Sales & Foreclosures: FAQ's

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I Have a Short Sale or Foreclosure Question

Questions are not categorized yet, but will be once the list exceeds twelve or more entries.   

I am purchasing a home together, 50-50, with another unmarried individual. I am eligible for the First-Time Home Buyer Credit of $8,000 and my co-Buyer is eligible for the $6,500 Tax Credit.  The home’s purchase price is $200,000; can we both receive the full credit of $8,000 and $6,500?

Unfortunately the answer is no.  You will have to allocate the total credit between both Buyers.  Here is what the IRS Instructions say:

My first inclination of “reasonable” is that since each Buyer owns the property 50-50, then the credit should be split 50-50. In the above purchase, however, how much is the credit?

There are two ways you can look at this. Since the credit is 10% of the total price of the home, then any home that is purchased for $80,000 or more is entitled to the full amount of the credit. In the above example, the $200,000 home would be eligible for an $8,000 credit and each Buyer would be entitled to a $4,000 credit on their tax return.

Another way to look at this would be to calculate the credit for each Buyer based on the full amount of the credit they are entitled to receive. The first Buyer is eligible for $8,000 and the 2^nd Buyer is eligible for $6,500.  You would then reduce the credit by half, as each Buyer owns one-half of the property.

I have not found any IRS regulations that tell you which method to use. Accordingly, I strongly recommend you check with a tax professional before proceeding. 

Probably, but you should check with a legal or financial advisor on the taxability of the short sale and your obligation to repay the loan(s).  Lenders make their own decision on what criteria to use in approving a short sale, but their primary motivation is the net return to them. 

If you have a genuine hardship and cannot afford the Vacation Home, they may approve a Short Sale as it would be more costly to foreclose on the property. If you would simply prefer to “get out of” the property and you do not have a valid Hardship case, they may not approve it.

Taxability of the Short Sale: Generally speaking, the amount of debt forgiven is considered income to you and reportable on your tax return. For example, if you owed $100,000 on your home but the lender was only able to recover $80,000, then the $20,000 debt that was “forgiven” is taxable income to you.

The Mortgage Forgiveness Tax Relief Act changes the taxability of the debt forgiveness for Primary Residences.  The amount of debt that is forgiven is no longer taxable for homes sold between 2007 and 2012, up to a limit of $1,000,000 ($2,000,000 if married and file a joint tax return). This would likely not apply to a Vacation home, meaning you would be taxed on the $20,000 in the previous example; however, you should verify this with your legal or financial advisor to be certain.

Obligation to Repay Loan: In Arizona and several other states, Lenders may not pursue home owners to collect the debt on a home they have lost through foreclosure. With short sales, this rule is less clear cut as the seller is voluntarily selling the home for less than they owe on it; however, in most cases Lenders are treating it the same as a foreclosure.  This is another good reason to check with your legal or financial advisor.

The above law, called the Anti-Deficiency Statute, applies to most, but not all home mortgages. For example, it does not apply to homes on more than 2 ½ acres and it must be a single family residence or duplex. Homeowners must also have “utilized” the home for six consecutive months and a certificate of occupancy must have been issued.

It does not apply to Vacation homes; however, and a Lender may only approve a Short Sale if the Buyer agrees to a new loan to pay off the debt. The Anti-Deficiency Statute also applies to only money purchase loans, meaning loans used to directly purchase the primary residence.  A Home Equity Line of Credit does not qualify.

The Lender may still be open to negotiation, however.  While they may insist the Buyer sign a Promissory Note, we have found that Lenders will sometimes back down, depending on the situation.

Buying Lender Owned (Foreclosure) Properties

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Foreclosures: A Buyer’s Overview

Buying Short Sales: The Good, The Bad & The Ugly

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Short Sales: A Buyers Overview

Short Sales & Foreclosures: A Homeowner's Perspective

Short Sales: A Seller's Overview

Pricing A Short Sale For Success

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Buying a Short Sale

Buying a Foreclosure

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