Short Sales Michelle Magee Magee Hartman, P.C. 444 N. Cedar Lake Road Round Lake, Illinois 60073 Phone (847) 546 0055 Fax (847) 546 8390 mm@mageehartman.com I. Why would anyone do a short sale? The home is underwater After costs of sale, the seller would have to bring significant funds to closing To avoid bankruptcy and/or foreclosure 1
II. Considerations in doing a short sale Reviewing the borrower s financial circumstance Is a short sale the best available option? Would borrower be better off in bankruptcy or foreclosure? Timing: is short sale the best option right now? Does the seller have somewhere else to live? Is the borrower co mingling assets with a nonborrower spouse? Is there time for a short sale? If a foreclosure sale date is scheduled, there may not be time Will there be a tax consequence? The borrower will receive a 1099 C for debt cancelation Will the borrower have to pay income tax on the canceled debt? Did the borrower file bankruptcy? Is the borrower insolvent? Will Congress extend the tax relief law for canceled mortgage debt? 2
Tax Relief for Mortgage Debt Mortgage Forgiveness Debt Relief Act of 2007 George Bush signed in 2007, covered through 2009 Created tax exemption for qualified principal residence indebtedness Tax exemption extended through 2016 No present exemption for 2017 tax year Is 2017 like 2015? The tax exemption for the 2015 tax year wasn t signed until December, 2015 For almost all short sales in 2015, we had to operate under the assumption that canceled debt would be taxable Seemed likely Congress would extend for 2015; extension was buried in a House appropriations bill H.R. 2543 Introduced May 18, 2017 by Rep. Tom Reed (R NY) Proposes to extend tax relief through 2018 3
Internal Revenue Code Section 108(a)(1)(E) Income from discharge of indebtedness (a) Exclusion from gross income (1) In general Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if (A) the discharge occurs in a title 11 case, (B) the discharge occurs when the taxpayer is insolvent, (C) the indebtedness discharged is qualified farm indebtedness, (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged (i) before January 1, 2017, or (ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2017. 26 U.S.C. 108(a)(1)(E) 4
Insolvency IRS insolvency vs. bankruptcy insolvency IRS includes all assets (retirement accounts, etc.) Subtract assets from liabilities to calculate IRS insolvency Total liabilities: $200,000 [Mortgage balance] Total assets: $180,000 [Home value] Insolvency = $20,000 [Can exclude $20,000 which is equal to the amount of debt canceled] 5
III. Processing a short sale Short sale lender s negotiations dept. is key Using an outside negotiator? Sending documents: note date and time sent Send what you think is needed Send the HUD or the closing disclosure with all of seller and buyer costs listed Problems in Processing Establishing property value Appraisals vs. BPO (Broker s Price Opinion) Submitting repair estimates Look into streamlining Fannie Mae, Freddie Mac, FHA all have criteria for streamlined short sales Letters of Explanation Explain why the deceased borrower has no income (no paystubs) 6
IV. Waiver of Deficiency FHA Pre foreclosure sale comes with waiver of deficiency Approval to Participate sets out sale terms and allows 120 days to sell Could require borrower to pay a cash contribution All other investors or lenders must specify in writing whether the mortgage balance will be canceled May require cash contribution or promissory note V. Closing with Approval Do approved terms match contract or is buyer agreed with changes? All extra costs on buyer s side must show on Buyer s CD Submit HUD at least 48 72 hours before closing Short sale lender needs to issue final approval Buyer s name must match approval letter Try name affidavit if buyer s lender requires middle initial or extra surname 7