Below is a response from my realtor. Please forward your thoughts regarding considering to foreclose my home.
Thanks
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Thank you for the short sale paperwork. I’ve been doing a great deal of thinking about your situation.
As I mentioned yesterday, we had a meeting today to answer questions about the short sale philosophy. I wanted to clarify some things at our meeting before I mentioned them to you. My main concern is the fact that after all is said and done you may still owe money - to the IRS! What I mean is: let’s say you were able to sell your condo for $120,000. That means the IRS will consider the difference between what you owe - $136,000 and $120,000 as “income” and tax it as such. Only your accountant or attorney can not advise you on what it may cost you in income tax. This doesn’t count for the fact the bank MAY want you to sign a note for the difference! It is all up to the mortgage lender. Your credit may be affected – again it depends upon what the lender dictates.
At this point, if it were me, I would seriously consider going with a foreclosure instead of a short sale. As I see it, you will be going to school in another year, right? You will probably be renting while doing so, right? If schooling takes a couple of years, will you be in a position of buying? If not, consider this. Instead of paying your monthly mortgage payments, put that money in the bank. Yes, in the bank. Most short sales will not be considered by lenders until at least 45 days have past since your last payment was due! Going into foreclosure takes at least an additional 3 months! Now we are into January, 2008. The money you have saved can be used to rent a place here and in NY. What you will loose is your credit rating. In today’s meeting credit was a major topic. Some said they were able to acquire a loan after 6 months and others said it took 3 years or more. Working, renting and going to school seems to have been your major goal for the near future, correct? I sensed that you do not know where you will eventually locate after school. Is this correct? After you finish school will you want to immediately buy a home or do you plan to rent while you see how you like your new location?
I think I know you well enough to say you are one of the people that takes their commitments seriously – including your obligations of paying your mortgage. An admirable quality! Today, foreclosures are a vehicle for solving a problem of your kind. Years ago, those who took such drastic measures were considered to be lazy, unproductive, etc. Today however, with the passing of time, people in foreclosure are viewed as being “good people with a financial problem”. My question to you is this: Why owe money when you could have money? What does being in debt for a misguided decision mean you must suffer undue financial circumstances? Remember, with any loan, banks will receive 3 times the sale price in interest and principle payments over the length of the loan agreement. Therefore, banks will loose only the interest that would have come to them!
I really empathize with you about what to do! That is why I strongly urge you to seek council from an attorney before you make your final decision.
Comments:
Hi Scott,
You don’t mention what state your home is in. Two things you need to know:
1. The taxes your Realtor mentioned are a reality whether the property is sold as a short sale, or at foreclosure auction. But you are likely to get more for the property with a short sale than with a foreclosure, thus your potential tax burden will be lower. This appears to be bad advice on your Realtor’s part.
2. With regards to the lender wanting a note for the difference you need to find out whether or not your state is a non-recourse state. In California for example the lender can’t get a judgement against you for the difference if the property is sold at trustee sale. In other states the lender can. In the states where the lender can get a judgement, it is reasonable they’d want a note instead.
Bottom line is that in a short sale you still have a seat at the table and some control of the outcome. At foreclosure auction you are simply a bystander and will have to live with whatever happens. No doubt the later is easier, but I personally would want to stay in control, maximize sales price, and find the best solution possible. I’d strongly urge you to reconsider a short sale, and the Realtor you’ve found to help.
Lance -
Isn't there a Homeownership Bill that will allow the "losses" not to be taxed in the years 2007-2009. I think this bill was passed in late 2007.
If so, I am unsure of the intricacies of the bill - does it cover all losses in this time frame? Also, this doesn't solve the recourse issue from the lender.
Any clarification of this would be helpful.
Thanks,
BOB
Bob,
That's right, there was a bill passed - the Mortgage Forgiveness Debt Relief Act, and even before the bill there often wasn't tax liability if the borrower was insolvent at the time. That said, I think Lance's feedback that it is still better to remain a party at the table and try to do a short sale is dead on.
Folks considering walking away should still consult an accountant regarding the tax issue. Especially in cases where the property is not owner occupied, or you've pulled out more than $500k ($250k single) as none of this tax relief applies to capital gains.
Sean
Sean -
Wow - Thanks for the very quick feedback. I agree that "to remain a party at the table and try to do a short sale" is in everyone's best interest.
Can you send me an e-mail - I would like to set up a time we can chat either by phone, IM or ie-mail. There are several aspects of short sale / foreclosure that I wanted to get your expertise on.
Thanks,
BOB
One clarification on the Mortgage Forgiveness Debt Relief Act is that if pertains to Purchase Money and money used to improve a property only. So, someone who refinanced to pay off non-house debt would not be forgiven for the "cash-out" portion (not used for home improvement) - So, this will create some tax consequence in many instances, unless of course, they are insovent.
Off the IRS website -->
What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
BOB
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