Short Sales vs. Foreclosures in Nevada - Answers to Common Questions

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Here is a preview of one of the many topics covered in this full day certification course.  This post compares short sales and foreclosures in the areas of tax consequences, credit impact, and deficiency judgments.

What is a Short Sale?

• A Short Sale is when the home sold for less than the debt against the property and the lender(s) agree to accept a discounted payoff.  The lender agrees to accept less than what is actually owed on the mortgage.
  
• A Foreclosure is when the lender seizes the home that the loan is secured by through the foreclosure process, which is notice of acceleration of note, notice of default, notice of sale, and then actual forced sale of the home known as a ‘trustee sale.’

What are the tax consequences?

• Short Sale & Foreclosure….all debt forgiven results in 1099C debt.  Whether it is a primary or rental property makes a difference as to how much tax you may pay.  Simply stated, if you get released from debt the IRS sees that as income to you, just like you got a pay check.  See this publication from the IRS http://www.irs.gov/pub/irs-pdf/p4681.pdf on “Canceled Debts Foreclosures Repossessions and Abandonments.”
• You may qualify for an exemption under the Mortgage Forgiveness Debt Relief Act - visit this IRS article for more information: http://www.irs.gov/individuals/article/0,,id=179414,00.html
  

What are the Credit Issues?

• Foreclosures and Short Sales will appear on your credit history and affect you for up to 10 years.  This may affect a.) employment or b.) security clearance, etc.  Rumor is that a short sale is better than foreclosure for these items?  There is no evidence to back this up.  Arguments on both sides are out there.  We do know that there is a specific spot on the credit reports for foreclosure, whereas short sales are reported differently.  We have also seen examples of the credit score being impacted based on the total number of missed payments. 
  

What is the liability for the Debt AFTER the foreclosure or short sale?

6 Months

• Foreclosure – The foreclosing lender has the right to sue the home owner after the foreclosure for the difference between the amount gained at the ‘trustee sale’ discussed above and the balance of debt owed.  The lender has only 180 days (six months) from trustee sale to file, after that the owner is no longer liable.
  

6 Years

• Foreclosure 2^nd Deeds – All deeds that are junior to the foreclosing lender have different rights than the foreclosing bank.  These lenders are called ‘sold off junior lien holders’ and they have six (6) years to recoup their debt.  That means you get foreclosed on November 12, 2009, these junior lien holders have until November 12, 2015 to sue you. 
  

Short Sale - All lenders that agree to a discounted payoff and ‘release the lien’ from the property to allow the short sale are no longer ‘secured lenders’ and are now ‘sold off junior lien holders’ as described above and have six (6) years to sue you.  UNLESS, the short sale is negotiated so the lender releases the homeowner from any future liability as to the forgiven debt.  Many lenders are taking a hard stance on this issue and NOT fully releasing and satisfying the forgiven debt.