Real Estate short selling

[Raider Bill]

Here lately I've been hearing a lot about short selling property. from what I gather, the bank agrees to take a lower price than owed. This I'm told is a big up and coming thing here in Florida.

Word is that this way theres no foreclousere on your credit report.
How can this be? Got to affect your credit?

A close friend that got way too overextended on her house asked me if I knew anyhting about it which I do not.

Any knowledge?

[cheyenne]

Because it's a sale not a forecloseure that has been agreed to by both parties. That being said it all depends on the agreement between the bank and the seller and the fine print of the contract. A good lawyer is a must to protect a sellers concerns. Cheyenne

[stonebroke]

I think though you have to report the amount forgiven as income and pay taxes on it.

Stonebroke

[beenthere]

I'll admit to not knowing, but I will wager that there are a lot of business's springing up to take someone's money to "try" to make that happen. Preying on those who are already overextended people.
Often hear their advertising about helping people with taxes owed, bad debts, etc. and they will (for a fee) try to get it taken care of. Must make good money, because they can afford TV commercials.

Just be cautious. Best for people to go direct to the creditor and see what can be worked out. IMO.  

I also can see the banks taking that information and loss, and claiming some of the bailout money.  >:( >:(

[nsmike]

I think I can explain short selling. If a bank forecloses it has to keep the property for the statutary redemption period before it can dispose of the property. In a short sale they avoid the holding costs like taxes, insurance and maintenance. In a lot of states property thats been forclosed goes the vacant building list which means it lmust be updated to current code which means it either loses value or increases costs. For the bank a sure writeoff today carrys less risk than holding the property in todays market.
Mike

[John Bartley]

I think though you have to report the amount forgiven as income and pay taxes on it.

Stonebroke

I don't know, so I can't say for sure, but if an income reporting is required, shouldn't there also be an accompanying capital loss to be used as a matching deduction? After all, there may be some virtual income, but the capital loss is real enough?

just wondering...

cheers

John

[farmerdoug]

A capital loss would only come into effect when you sell it for less that you paid.  If you borrowed more than you paid for the house and you sell it for more than you paid but then less than you you owe then you will have income and capital gain taxes both.

[cheyenne]

Farmerdoug has just explained why we have this mess today. Everybody wanted a bite of the apple, now they all have tummy aches. They all made thier beds now let them sleep in it. These bailouts are a joke and won't work. The worst is yet to come. Cash is King. On a side note, another sawmill in my area just shut down! what does that tell us. Cheyenne

[scsmith42]

Stonebroke is correct.  The IRS treats debt forgiveness as income, and it is taxable.

[Ironwood]

Here all along we've been living responsibly, w/ in our means and WHAT, NO BAILOUT FOR ME!? I should have been mismanaging my business, and life, so I can get in on some of that bailout cash. When are the people who have done things responsibly going to benefit? Kinda makes me want to puke.  BLAH  >:( :(


         Ironwood

[logwalker]

Stonebroke is correct.  The IRS treats debt forgiveness as income, and it is taxable.

Let's say you took a loan for 250k for a house and the bank forecloses or threatens to. You find a buyer willing to buy it for 200k on a short sale. The bank is agrees to take the loss. I have trouble seeing how the IRS can construe that as a taxable gain. After all you never actually got the money. I do think it would be reported to the credit agencies and go against your record.

Ironwood, they get the bailout and we get the bill. Vote all them out of office next chance you get. Joe

[farmerdoug]

Logwalker,

If you borrowed 250,000 you better have gotten the money.  If you did not then why did you borrow it?

[DanG]

According to Dave Ramsey, and I've heard him explain this a number of times, you need to have an ironclad agreement, in writing, from the bank stating that they will accept the short-sale amount as payment in full.  If you don't, you could be liable for the amount of shortfall.  Don't take anything you hear over the phone as the Gospel!  It needs to be written out, and you need to read and understand all of it.

[Raider Bill]

I hate to see her do this, she worked hard to buy this property [single] and really fix it up by herself but her job has fallen through on her and she feels although she hasn't missed a payment the time is coming.

You are right there's a line wanting to "handle" this for her with buyers waiting. Someone's making money here.

Thanks,

My advise will be to hang in there.

[Ironwood]

I saw one gal on TV saying she had all her coulde-sac neighbors go into foreclosure, and untimately her county job fell through and she was NOT going to spend her 401K or savings to stay in the house!,.......................Kinda got me thinking, I suppose I would do the same, but what about personal responsibilty? You committed to this, you should follow through, I dunno, it is complex. She had no qualms of walking away. I thought it at least interesting.

Ironwood

[DanG]

Ironwood, it is a complex situation indeed.  If that lady has no hope of being able to stay in the home, she is wise to not sink her retirement fund into it.  The mortgage company accepted a certain amount of risk going in, and have been recieving interest payments for that.  They even share a certain amount of responsibility for the loss of her job, in all likelyhood.  If they had conducted their business responsibly, the house would be worth more than they have in it, so they wouldn't lose money, anyway.  Also, I'm hearing the the Government was insisting that the mortgage companies offer loans to people that couldn't afford them, so they bear some responsibility as well.  We, the people, elected the morons that did that, so we, the people are gonna pay for it.  About all we can do about it, this go-round, is to smile and pay the bill.  To prevent it from happening again, we can vote the nitwits out of office! >:(

[moonhill]

Ironwood, the woman on TV should put all her savings and 401k into the house.  That is if it makes the property completely hers, it pays the debt completely.  I wouldn't trust 401k's or paper dollars/savings.  If it is not tangible it is in question.   I wish I had everything in Gold coins.  When you wake up and you house is gone something is wrong.  It wouldn't surprise me to wake up one morning and inquire if my savings was still in the bank and there was no response.   I must say the future looks bleak.

Tim

[scsmith42]

Logwalker, think of it like this.

The bank gave you 250K, based upon your credit record and promise to repay them with interest.

You used the money to buy something.  Maybe you used what you purchased to collaterilize the note from the bank, perhaps you didn't (such as using a Home Owners equity line to purchase a boat, or a different piece of real estate).

You repay the bank 50K less than they gave you.

At the end of the day, from a cash perspective you received 50K more than you repaid the bank.  You also may not have repaid them some interest that was due.

The actual asset that secures the loan is incidental. 

The policy of the IRS is that the 50K is taxable income - I think ordinary income but am not sure.  I'm not sure about if taxes are due interest that may have been waived if it was part of the 50K note. 

At the same time, you can claim a capitol loss on selling an asset for 50K less than you paid for it, but as I recall capitol losses will not offset ordinary income, only capitol income.  So you may get hammered with a loss that really doesn't help, while owing a tax in a separate class.

[logwalker]

scsmith42, You may be right. But the borrower never actually receives the proceeds from the loan. It goes to the seller. It doesn't seem like a gain to me. But the IRS may see it differently. Does the IRS have this on a website? Another way to approach this is that the purchase was a investment and as such would offset the capital loss of the short sale. I think I would fight it. But then I don't see this happening to me. Joe

[logwalker]

It was reported this morning that 533,000 lost jobs in November and 10% of all mortgages are at least 1 month late or in foreclosure. Those are scary numbers. Joe

[stonebroke]

I think the IRS treats it like a gift. You owed the bank extra money and they gave you the money you agreed not to pay. Nothing the IRS does makes any sense.

Stoneboke

[Roxie]

In 2007 the IRS allowed "restructured" mortgages to be free from income tax.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Restructed debt (credit cards, etc) is still taxable income.

[scsmith42]

Roxie, that's great news for Bill's friend.

LW - what's the difference between the bank loaning you 200K, giving it to you via a check, which you turn around and write another check for 200K to the person selling you the house, and then turn around and give the bank a lien against the house to secure the 200K note,

As opposed to just having the bank write the check to the seller?

The net result is the same.

Now if the bank was both the seller as well as the lender, then that could be different.

[Raider Bill]

Thanks Roxie for the info!

[stonebroke]

I was wrong.

Stonebroke