Short Sales: Act Fast To Have Real Estate Debt Forgiven

Although the days of mass foreclosures are behind us, our economy is still up and down, the housing market still fluctuates, and thus, there is still the chance that you could find yourself living in what is upside down (or negative equity) property. One solution for you may be a short sale. But what is a short sale and how does it work?

Short Sales

In a traditional sale of a home, if you have an outstanding balance on your mortgage, the buyer’s money pays off the balance of the loan. Because your house has some equity (i.e., it’s worth more than the amount of debt that you owe on it), the purchase price both pays off the mortgage, and leaves you with some extra money as well, to do what you want with (usually, to roll over as a deposit into your new home, if you are buying one).

Negative Equity Problems

But sometimes, our homes do not appreciate in value as much as we wanted them to. Or, perhaps you bought property at too high of a price, and the property can’t appreciate as much as it needs to, and you now owe more on the loan than what the property is worth.

How do you get out of that property? The answer is a short sale. A short sale is where your lender agrees to allow you to sell the property, even though the purchase price isn’t fully paying off the balance that you owe to the lender.

If the balance isn’t paid off by the proceeds of the sale, what happens to the balance? There are two scenarios.

In the first, you would personally be liable for the balance of the loan balance. That is definitely not an ideal situation and you should avoid ever doing a short sale where you are left with a personal balance owed on the remaining loan balance.

The second option is that your lender forgives the balance that you owe on the loan. Of course, you need this permission before you proceed with the short sale. Getting this forgiveness may take negotiation and an exchange of documents; the lender may want to see that you truly could not afford to pay off the balance of the loan yourself.

Excused Debt and Taxes

Anytime you have debt excused by any creditor, the IRS can count that excused debt as earned income. And, if your mortgage lender agrees to excuse you from $50,000 in mortgage loan debt so that you can complete a short sale and get out of negative equity property, the last thing you need is a tax bill for $50,000 extra in income.

The good news is that since the 2020 COVID pandemic, the government has passed laws that excuse this forgiven debt as income. This exclusion applies to most excused mortgage debt through 2025, up to $750,000, for residential property.

Are you trying to get out of property that is too expensive or not worth what you owe? Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today to talk about your short sale options.

Sources:

turbotax.intuit.com/tax-tips/home-ownership/how-short-sales-and-foreclosures-affect-your-taxes/L3itburIV

turbotax.intuit.com/tax-tips/home-ownership/how-to-avoid-taxes-on-canceled-mortgage-debt/L8jmKvTQU