During the economic downturn of the mid-2000s, shorts sales were everywhere. And while they have slowed down a bit, short sales are still used—and because of the 2020 COVID crisis, there is even a benefit to help you complete a short sale, if you act quickly enough.
What is a Short Sale?
A short sale is when you sell a home that has negative equity.
Normally if your home is worth less than what you owe on it, and you have negative equity, you cannot sell the home—the purchase price (assuming that price was the fair market value of the home) will not be sufficient to pay off the mortgage.
You are stuck with a home that is worth less than what is owed on it, and if you have financial problems that are putting you in foreclosure, or you fear going into foreclosure in the near future, you cannot get out of it by selling the home. You are essentially trapped.
How Does a Short Sale Help?
A short sale fixes that. In a short sale, the seller gets permission from the lender to sell the home, even though the purchase price is not enough to pay off the existing mortgage balance.
So what happens to that balance? Normally, the seller would owe the money to the bank (or in many cases, the seller may have to declare bankruptcy to get rid of that balance). That should never be an option, although many people were forced to do just that during the foreclosure crisis.
But in many short sales (if they are done properly, with a real estate attorney), the seller negotiates with the bank before the sale, to get the mortgage balance waived or excused. The bank may want to see financial records, to justify the fact that the existing balance truly cannot be paid back. The home is sold, the seller is out from under the financial burden of the home and walks away owing nothing (and often, the buyer gets a good deal on property that is being short-sold).
You Forget the Taxes
If you do get the balance of the loan forgiven by the lender, you now potentially have another problem: That mortgage money you now do not owe is forgiven debt, which counts as taxable income to the IRS. You have just gotten out of one problem—a negative equity home—and gotten yourself into another one—a big income tax debt (arguably, an even worse problem).
New Law Helps Forgiven Debt Taxes
As a result of relief laws implemented during the 2020 COVID shutdowns, up until the tax year 2025, the government will forgive any excused income on mortgaged or short-sold property, so long as the property is residential, and so long as the forgiven debt is less than $350,000 if you are married and filing separately, or $750,000 otherwise. This is a big benefit for anybody thinking about a short sale.
Note that as a general rule, if a taxpayer is insolvent, they generally do not owe taxes on any forgiven debt of any kind. Insolvent means that what you owe exceeds the value of your assets.
If you need a short sale, now is the time. Ask us about doing it the right way for you. Contact our New Jersey real estate law and closing attorneys at The Law Office of Agnes Rybar LLC today.
Sources
https://www.alllaw.com/articles/nolo/foreclosure/will-short-sale-tax-consequences.html
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