| What's positive about being foreclosed upon or | | | | with the bank to sell the home while they |
| selling your home for less than you owe? Well, for | | | | continue to occupy the property. This may result |
| most people, not much. Yes, you are relieved of | | | | in a short sale, whereby the bank agrees to |
| an onerous mortgage loan and you are now free | | | | accept less than is owed on the outstanding |
| to find housing that is more affordable within your | | | | mortgage. Together, the bank and homeowner |
| budget. But not everyone fully understands the | | | | work to sell at the highest possible price given the |
| lingering effects of a foreclosure as it pertains to | | | | conditions of the prevailing market. Working |
| the mortgage debt forgiveness. This applies to | | | | together allows the home to be maintained and |
| foreclosures, short sales and a deed in lieu of | | | | occupied during the course of the sale. This |
| foreclosure. | | | | generally is less costly to the lender and is one of |
| Foreclosure can be one of the most devastating | | | | the reasons why they entertain short sales. |
| things a homeowner can face. At a minimum, | | | | In general, short sales are less "shocking" to the |
| they will end up with damaged credit. Until | | | | market values in comparison to a lender going |
| recently, the tax laws further penalized | | | | through the foreclosure process and then reselling |
| homeowners who were relieved of mortgage | | | | the property as an REO. This should be |
| debt obligations with additional taxation. | | | | encouraged where possible. |
| Homeowners owe taxes on the amount of the | | | | Tax wise, homeowners still receive a 1099C. |
| debt obligation from which they are relieved. For | | | | From a credit report perspective, the lender |
| example, let's look at a short sale. If a bank | | | | usually won't report a foreclosure against the |
| agreed to accept $200,000 as payment in full to | | | | homeowner if they sell with a short sale. A short |
| satisfy a mortgage where the homeowner owed | | | | sale in that instance will be beneficial to the seller's |
| $250,000, the homeowner would owe taxes on | | | | credit and may be helpful when the seller |
| $50,000. They were relieved of repaying $50,000 | | | | becomes a buyer and wants to obtain another |
| in mortgage debt. When you are relieved of debt, | | | | mortgage in the future. |
| you are actually benefiting because you no longer | | | | In Minnesota we have a unique situation regarding |
| have the obligation to pay it back. Hence you | | | | foreclosures. For owner occupied properties, we |
| must pay tax on this "unrealized income" even if | | | | have a 6 month right of redemption from the |
| there was no direct corresponding benefit, such | | | | date of the Sheriff's sale. Because of the long |
| as equity proceeds from a sale. At the same | | | | redemption period, during which no payments are |
| time, how is the homeowner who just lost | | | | due, many in Minnesota are opting to be |
| everything going to be able to pay tax on the | | | | foreclosed upon instead so they can live in the |
| differential of the satisfied mortgage obligation | | | | home for free. You see this occurring most often |
| when they received no tangible proceeds from | | | | where preservation of a one's credit rating is no |
| the sale? | | | | longer important to the homeowner. |
| As we have just seen, the amount of debt | | | | To encourage lenders and homeowners to work |
| forgiveness is considered income. All debt | | | | together, the government has just created a new |
| forgiveness, not just mortgage debt, results in | | | | law. The law is H.R. 3648, entitled Mortgage |
| reportable taxable income. Many people who've | | | | Forgiveness Act of 2007 and was signed into law |
| walked away from their homes have found this | | | | as of mid December 2007. Here's what the law |
| out the hard way. Many found out at the end of | | | | does: it waives taxes for debts forgiven from the |
| the year when they opened their mail and found | | | | beginning of 2007 to the end of 2009. This means |
| they'd received a 1099C. The 1099C is the IRS | | | | no more 1099C, at least during this time frame. |
| form that the creditor gives the debtor when | | | | Can you see the implications? This means that |
| they have forgiveness of debt. | | | | homeowners and lenders can work together to |
| Today we have a record number of foreclosures. | | | | either sell or refinance the existing mortgage debt, |
| When banks and lenders sell homes they've | | | | without having to recognize the taxes due on the |
| gotten back during the foreclosure process they | | | | amount forgiven. It provides an incentive to |
| are less concerned about the bottom line and | | | | protect your credit and work out an acceptable |
| more concerned about being rid of the collateral. | | | | solution, such as a short sale. Income taxes are |
| This can result in spiraling downward values in | | | | taken out of the equation since there isn't |
| areas or communities where foreclosures are high. | | | | anymore inherent tax liability from mortgage |
| Large numbers of foreclosures like we are | | | | forgiveness. |
| currently experiencing are hurting our overall real | | | | This should slow down the foreclosure crisis and |
| estate market valuations. | | | | allow values to stabilize. This is a good law that |
| One solution to the problem has been to | | | | should help ease the mortgage and real estate |
| encourage those homeowners in distress to work | | | | crisis we are facing today. |