A bill was passed recently providing some relief for families and individuals affected by the recent surge of looming foreclosures. When people sell their houses short (i.e. sell their home for less than they owe on it with permission from the bank causing the bank to “forgive” thousands or tens of thousands of dollars to avoid a foreclosure.) there is loss for the banks and gain for the former homeowner.
Example (and to keep the numbers simple – I’ve not included Real Estate Sales Fees, Closing Fees etc. For purposes of this example, consider them included):
$100,000 Mortgage Balance
$85,000 Final Short Sale Price
Loss to Bank: $15,0000
Gain to seller (forgiven debt) $15,000
In previous situations banks would 1099 the previous owners for their gain, but the IRS does not recognize this as gain for most situations anymore. As the article states “we don’t want to kick them while they’re down.”
Many former short sale owners aren’t in the clear just yet – many states (Utah for example) allow the banks to come back after for their losses. Often times these are negotiated into the deal.