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Debt Relief – Insolvency – Bankruptcy Information » Insolvency » I am having a difficult time understanding short sale consequences. Can someone refer me to a web site or #?

I am having a difficult time understanding short sale consequences. Can someone refer me to a web site or #?

I am being told that I have to pay the difference of the short sale back to countrywide pay taxes on a 1099 form, that California is not a deficiency judgement state so even though I have a recourse loan I don’t have to pay the difference but I do have to pay the taxes. I am being thrown words such as insolvency, judicial foreclosure, non-judicial foreclosure, trust deed foreclosure…what does all this mean?

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2 Responses to "I am having a difficult time understanding short sale consequences. Can someone refer me to a web site or #?"

  1. John J says:
    that doesnt sound right…the whole point of a short sale is the lender agrees to take less to cover some of their loss …it sounds like they just want more out of you…either they agree to the short sale at the set sales price or not..cant have it both ways…contact an attorney
  2. MLaw says:
    Hmmm . . . In general, the amount of debt forgiven in a short sale, is considered by the IRS “income” to the debtor/seller & so income taxes must be paid on the amount. However if it was originally a “non-recourse loan,” meaning the lender agreed to look only to the property and not to obtain a judgment or pursue the borrower for the difference, then the forgiven amount is NOT considered income. Another exception to treating a forgiven amount as income is if the debtor was bankrupt or “insolvent” at the time of the short sale. Bankruptcy is easy to prove; non-bankrupt insolvency much more difficult. Almost no residential mortgage loans are “non-recourse.” However, in some states, such as CA, where Deeds of Trust permitting “non-judicial” foreclosure proceedings are permitted, such non-judicial foreclosures do not result in deficiency judgments, and so a short sale in such cases should not result in treatment of the forgiven debt as income.

    The bank agreeing to a short sale must report the forgiven debt on a 1099-C like any other income.

    Note: I am not a CA attorney & this should be treated as a lay answer. Speak to a CA attorney or an accountant for a definitive answer or for any tax advice.

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