Clients with Short Sale or Foreclosure Real Estate

As a Realtor, I am often asked to "advise" a potential client on Short Sale or Foreclosure situations.  since I am not an Attorney, I demure from giving advice, but I will refer people to attornies who are specialists in their field.  I repeat, SPECIALISTS, because I find that even attornies do not necessarily have all of the information necessary to properly counsel people in this situation.

Some things that I have noticed in other BLOGS...
1.  One Realtor warned of DIRE CONSEQUENCES to Short Sale or Foreclosure situations, predicting that any action resulting in loss to the bank would probably result in the IRS taxing the entire mortgage amount plus an automatic deficiency judgement from the lender to recover all losses.
2.  A BLOG on another website predicted that walking away from a mortgage would result in no consequences and furthermore, it was likely that the property owner could get another mortgage quickly by following a few steps.
3.  A newspaper article predicted that we would have a generation of persons who would be "renters for life" because of foreclosure histories.
4.  A longer article in today's newspaper, written by a real estate attorney, put a little different spin on the situation.

He noted that there are consequences. 
First of all, the IRS really can go after a defaulter.  The process is that the bank issues a 1099 for the amount of the loss, then the defaulter reports the 1099 on his tax return. 
Second of all, the bank can choose to go after a deficiency judgement to recover it's loss.

This is where his analysis differs from many others.  The 1099 will not be for the entire amount of the mortgage unless the bank loses 100%.  The IRS will calculate cancellation of debt "income" in the same manner that a court would calculate a deficiency judgment, i.e., by subtracting the fair market value from the outstanding loan balance, which would probably include a lot of late fees, acceleration fees, etc.  Still, it would probably be less than 100%.  So, not only would you need a specialist attorney, you also would need a specialist CPA to calculate your taxes.

One BIG LOOPHOLE.......  Effective December 2007 through December 2009.......The IRS may not pursue income tax on HOMESTEAD properties that are foreclosed.   SEE IRS publications  982 and 544 for more information and consult the CPA on this issue.
Apparently, if the borrower is defined by the IRS as insolvent, this is another loophole. 
As may be a  borrower who chooses to declare bankruptcy.  (another attorney specialist).

As to deficiency judgements, the takeaway from the attorney's article is that what WILL happen and what MAY happen are two different things.  Negotiation with the bank for a Deed In Lieu of Foreclosure, for instance, may result in a more positive outcome, depending upon the bank.

http://www.news-press.com/apps/pbcs.dll/article?AID=2008804200321

JimG