'Short' Sales

Welcome back! We took a few days off for the holidays: visit with family and friends, celebrate, yada yada...


Anyway, another thing one hears more and more these days is the 'short sale'. This is another variant of the default/foreclosure crisis that is sweeping the nation these days. What the term means is that the homeowner who is having trouble meeting the terms of the mortgage decides to sell the property. There is only one problem--the value of the house is less than the amount for the mortgage(s). In order to accomplish the sale, the seller has to persuade the lender(s) to accept less than the amount owed on the debt at close of the sale. The lender will thus end up 'short', hence the name. This is somewhat troubling to the homeowner, but may be the only way to avoid foreclosure in some cases.



However, a few things that you should be aware of before proceeding on a 'short':

1.) Doing a short sale will not salvage your credit rating. It'll still be less than pristine when you are done--but not as bad as if you hang on until the lender actually forecloses;

2.) By doing a short, you will have an extra hit on your income taxes for the year; this is because the amount that the bank agrees to accept as a short and final payment means that it has forgiven the money it's not going to receive as part of the payoff. The IRS regards forgiven debt as normal income and it taxes it as normal income in the year it is forgiven. So, after you've removed yourself from your pending foreclosure by going short, you can expect to receive a Form 1099 at year end from the bank to include with your income tax return. Not great, but at least you can now move on from your foreclosure worries until you're back on your feet again.