Unforeseen Tax Issues Triggered by Foreclosures & Short Sales

 SURPRISE! SURPRISE! SURPRISE!  Individual homeowner's facing foreclosure, short sale or a Deed in Lieu of Foreclosure would be wise to check with their income tax professional to determine what income tax impact they might face down the road.  There are two tax situations (which can get quite involved...Principal residence? Business or Investment Property?, Recourse or Nonrecourse debt?) to review when looking at giving back a property to cancel or release debt.  


(1)  Recognition of gain or loss on the transaction


(2)  Recognition of cancellation of debt income (COD)



Only your tax professional can really determine how this affects you personally so spend a few dollars up front to determine your course of action.  It's like adding insult to injury...first you
lose your home and then you get zapped with an unexpected tax bill.


 Linda Shank is a Broker/Owner & Certified Residential Specialist in the Southeast Phoenix Valley who has been selling real estate since 1978.  She is experiencing her third down market cycle.

FLIP THIS HOUSE? MAYBE NOT?

FNMA, FHMLC, and the banks such as Wells, Chase, etc. continue to warn lenders to apply extra scrutiny on transactions where the seller has owned the home less than 90 days.  It is possible that they may soon adopt a 90 day rule similar to FHA's rules, but in the mean time, Bell Mortgage in Phoenix Arizona is continuing to process these transactions on a case by case basis.  They still have two investors who will accept these loans, and there are currently two mortgage insurance companies who will insure them up to 90% LTV, provided the borrowers have strong files with solid home appraisals.

 

Here are some areas of concern:

 

1)  The seller must have clear title to the property when they sign the purchase contract.  All liens must be paid off.  Short sale middlemen do not have clear title. 

 

2)  The title company must supply the lender with a 24 month chain of title.  We may need to obtain copies of the Trustee Deed in order to determine who is actually on title.

 

3)  Multiple ownership changes in a short period of time (other than between financial institutions and their agents) can be a cause of concern.

 

4)  Large changes in value with little or no improvement to the property may trigger additional scrutiny of the loan file.

 

5)  Sales that are not arms length (sale to a relative) may cause the transaction to be denied.

 

Courtesy of Jay Starks, Bell Mortgage, Phoenix, Arizona

SHORT SALES DEFINED & WHAT INFO TO PROVIDE LENDER & REALTOR

Here's my definition in a nutshell: A short sale is nothing more than negotiating with loan holders a payoff for less than what they are owed. Otherwise, a sale of debt generally on a piece of real estate, short of the full amount owed. It does not extinguish the remaining balance unless this is clearly settled in the acceptance of the offer. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing since there are legal and other carrying costs that are associated with a foreclosure. This occurs on a daily basis since many homes have loans that are considerably higher than the current value of the home. If you would like my Homeowner's Short Sale 16-Step Instructions emailed to you please contact me through this blog site.