Short Sale - not living in the property

[nj2tx]

Long story, dh has had problems staying employed for the past two years. We own (on paper) a house that is about 125k under water. We tried to sell it last year, but we were 130k more than any other home in the subdivision, and didn't have a single offer (we over built the house - thought we'd live there forever - Ha!). Finally dh got a job making decent, but not the same money (about 70% of what he used to), so we decided to lease the house out for $100 less than our monthly mortgage. Did a two year lease, thought we'd give ourselves two years to catch our breath and dh was looking at a chapter 13 to deal with over 100k in unsecured debt racked up trying to pay a $3900 mortgage for almost two years with his earning slashed by almost 70%.

 

Anyway, dh lost that job 2 months after being hired, lost a second job a couple of months later and is now working his flowers off to make what he made in the 80s. The taxes came due (10K) and we decided can't take anymore loses, so we were talking to a Realtor about doing a short sale. The lease provision offers us the option to sell at any time.

 

My concern is the Realtor told me tonight that because of the fact that we are not living in the home (because we can't afford to and can't sell it!), we would not be covered by the "Debt forgivness Act" and that the bank would send us a 1099c and we would have to pay the IRS tax on approximatly $150k (the amount she estimates the banks will have to eat to sell the house, there is a 1st and 2nd, 80/20 typical 2006 loan).

 

The wording of the act reads something along the lines of the "debt had to be incurred in the purchase of a primary residence". Well when we bought it (signed for it really), it was our primary residence. We own no other home and are living in a lease home.

 

Would we really be held liable for the loss because we don't occupy the residence? We're not investors, we own no other home and take $100 loss every month that goes by on it. I just can't see owing the IRS tax on $150k on top of everything we've been through. Dh is now looking at a ch 7, which I was going to stay out of (I have almost no debt in my name beside for the house, and am a credit fanatic, so my credit is actually perfect at this point, even though I'm broke). I thought I could deal with a short sale on my report, as long as I keep my car payment current and any cards that don't shut down on me. But, I can't have an IRS lean on me for the tax on that amount of money - I know it couldn't be discharged in a bk, and would follow us forever.

 

Does anyone know if we would not be covered by the Debt Forgivness Act because we don't live in the home? We live in TX, if that has any bearing.

 

Thanks for any and all opinions.

 

nj2tx

Edited February 5, 2010 by nj2tx

[nj2tx]

Anything, anybody - please???

[SportsNut]

Most Realtors are marginal agents, but even worse at giving tax advice. In other words the agent doesn't know of what they speak.

 

Sounds like you are financially underwater; negative net worth. If this is so, it matters not whether it is a personal residence or not.

The agent is accurate that you wouldn't qualify under the "Debt forgivness Act" as an owner occupant, but there are other ways

that this debt forgiveness is NOT taxable.

 

Suggest that you use a CPA or enrolled agent to prepare your taxes in the year that debt is forgiven. As long as you are "insolvent"

prior to debt forgiveness, meaning that you owe more than what you are worth, in total not just this property, then the debt forgiven

is not taxable income. Just because they send you a 1099-C doesn't make it taxable income; it simply makes it reportable income.

 

IRS Publication 544 goes into this aspect. IRS Form 982 is how the debt forgiveness is reported in that year and once the calculation

is completed, showing net worth, etc., then you will owe NO taxes on the forgiven debt. Done, finito, don;t worry about it one more

minute. Suggest you look over the irs form 982 link below, and you will quickly see what I am referring to here.

 

IRS Form 982

[bullthistle]

It's true most real estate agents are marginal at best, but before you worry about the 1099, I would check to see if your state is listed as going after real estate deficiency balances and if it does get the bank to sign off that they will not sell the balance off after a short sale, that you are not liable. In writing and lock it safely away.

[bullthistle]

It's true most real estate agents are marginal at best, but before you worry about the 1099, I would check to see if your state is listed as going after real estate deficiency balances and if it does get the bank to sign off that they will not sell the balance off after a short sale, that you are not liable. In writing and lock it safely away.

[nj2tx]

It's true most real estate agents are marginal at best, but before you worry about the 1099, I would check to see if your state is listed as going after real estate deficiency balances and if it does get the bank to sign off that they will not sell the balance off after a short sale, that you are not liable. In writing and lock it safely away.

 

Thank you both so much for your replies. I probably don't have to tell you how much the advice means to me at this point in time. I was speaking with the agent on Friday, about getting a full release (a relase on the lien/collaterol as well as the promissary note), based on a yahoo article link provides in this forum. She said that it's up to the bank whether or not they will offer it, it's not something we can insist on. I hope I'm not operating of of idealism (or closer to reality desperation), but if a bank favors a short sale over a foreclosure, would it be safe to assume that we should be able to outline some of the conditions that we are seeking, to facilitate a short sale and not just a 'jingle mail' or including the house in a bankruptcy (dh is definetly filing a chp 7, no choice left almost 115k in unsecured credit card debt).

 

The agent is a 'friendly accquaintance' and claims to have negotiatede 10 short sales. I just don't want to do anything at this point to make our situation any worse, it seems that nearly every bad thing that can happen to a family has come our way in the past 2+ years (with the exception of our children's health - thank God), and I just don't want to do one more wrong thing. It really is frighgtening to be facing so much.

 

If I didn't state it in my initial post the loan is 80/20 interest only on the first held by Citimortgage, the 2nd is held by Chase. My understanding is we will be negotating with Citi. Is it likely if we can get them to include a full release, they will be able to negotiate that with Chase, knowing that Chase will likely get less than $5k, since the house is underwater for more than the entire amount of the second loan?

 

Also, Bullthistle, in answer to your question, I found the following quoted in the Yahoo article: In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms."

 

Again thank you for the answers and for the IRS link - both were very helpful and reassuring.

 

Any further advice, opinions or direction would be greatly appreciated.

 

nj2tx

[SportsNut]

I was speaking with the agent on Friday, about getting a full release (a relase on the lien/collaterol as well as the promissary note), based on a yahoo article link provides in this forum. She said that it's up to the bank whether or not they will offer it, it's not something we can insist on. I hope I'm not operating of of idealism (or closer to reality desperation), but if a bank favors a short sale over a foreclosure, would it be safe to assume that we should be able to outline some of the conditions that we are seeking, to facilitate a short sale and not just a 'jingle mail' or including the house in a bankruptcy (dh is definetly filing a chp 7, no choice left almost 115k in unsecured credit card debt).

 

Again, what you write here is the Agents opinion, which is based on LIMITED experience. You should NOT make decisions based on this limited advice; period. Adopt the mindset that YOU DECIDE here, if you are going to acquiesse to the lender, and the only way that you will is IF you get the RELEASE completely. NO RELEASE means NO SHORT SALE, no middle ground here. If they don't meet YOUR TERMS then they don't get keys or deed. Let them foreclose, as this will not hurt you any more than a short sale w/o a release; in fact that approach w/o the release is worse IMO.

 

The agent is a 'friendly accquaintance' and claims to have negotiatede 10 short sales. I just don't want to do anything at this point to make our situation any worse...

 

Then hold your ground, DO NOT folow the advice of the agent who stands to gain financially by you agreeing to short sale, even if it is NOT in your best interest. Take advice from someone who does not have a dog in your fight; they are motivated only by seeing you do what is in your best interest. This does not usually include an agent compensated by your concession here.

 

Also, Bullthistle, in answer to your question, I found the following quoted in the Yahoo article: In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms."

 

Unless I missed it in your post, I didn't see what state you are located. You do accurately quote the site and the 30 states that allow def judg; which means 20 do not allow def judg.

 

nj2tx

[nj2tx]

SportsNut, Thanks for all the advice and re-enforcement, it means a lot.

 

I live in TX- thus my quoting the article which listed which states allow for deficiency judgements.

 

Spoke with an entry level clerk in Citi's short sale department w/ the Realtor on the line today. The Realtor asked about deed-in-leiu and if it would be considered with a second lien on the house. The Clerk said as long as "Citi holds the first position" they would entertain a deed-in-lieu after 60 days on the market.

 

Would this be favorable? I asked if they negotiatied the deed-in-lieu with the 2nd, and she said that I would have to contact Chase (the 2nd) directly to let them know that we are seeking a short sale and would like to be considered for a deed-in-lieu.

 

What do you think, is it a possibility and would it be favorable over a shortsale in any way?

 

Thanks,

 

nj2tx

[SportsNut]

SportsNut, Thanks for all the advice and re-enforcement, it means a lot.

 

I live in TX- thus my quoting the article which listed which states allow for deficiency judgements.

 

Spoke with an entry level clerk in Citi's short sale department w/ the Realtor on the line today. The Realtor asked about deed-in-leiu and if it would be considered with a second lien on the house. The Clerk said as long as "Citi holds the first position" they would entertain a deed-in-lieu after 60 days on the market.

 

Would this be favorable? I asked if they negotiatied the deed-in-lieu with the 2nd, and she said that I would have to contact Chase (the 2nd) directly to let them know that we are seeking a short sale and would like to be considered for a deed-in-lieu.

 

What do you think, is it a possibility and would it be favorable over a shortsale in any way?

 

Thanks,

 

nj2tx

 

The key words above are: ENTRY LEVEL CLERK, SHORT SALE DEPT... and you (your agent) are asking them a legal question, really, about will they accept a Deed in lieu (DIL) with a Jr lender involved...?

 

Keep in mind this entry leveler doesn't really grasp what all that means... so their answer means NOTHING at all, IMO.

 

I can't imagine CITI agreeing to a DIL where Chase doesn't just agree to drop dead and issue a full release of mtg. Why would Chase do that...? They won't, for nothing. I can't imagine CITI paying Chase anything to get out of the way for a DIL. DIL's are fraught with many potential legal issues and quite a few lenders won't even consider them for this reason.

 

Now place yourself in Chase's position. Someone calls you up and says I want to deed my house over to the 1st mtg lender and I want you to agree to this. What do you say... (keep in mind, you are now Chase). I would imagine you would ask... "How much you going to pay me to sign the release of mtg...?", right...? So do you intend to offer them anything for this release...? If not, then I would guess that you are spinning your wheels here... JMHO.

 

So that brings us back to here:

 

"Dh is now looking at a ch 7, which I was going to stay out of (I have almost no debt in my name beside for the house, and am a credit fanatic, so my credit is actually perfect at this point, even though I'm broke). I thought I could deal with a short sale on my report, as long as I keep my car payment current and any cards that don't shut down on me. But, I can't have an IRS lean on me for the tax on that amount of money - I know it couldn't be discharged in a bk, and would follow us forever."

 

Your biggest problem will be that TX is comm prop state, and as spouse you are respn for debts of one another. Sux for sure. So it appears that your best option is going to be a Ch 7 for both of you... This will take you time to get your mind around it, since you are self described credit fanatic, but it appears that this is your best option. Sorry.

[nj2tx]

Actually SportsNut, I appreciate all the advice/opinions that you've given me; I particularly think your take on how Chase would react to a DIL as the 2nd on the loan. Very well thought out.

 

However, even though TX is a community property state, we don't both have to file bk. We've talked to two different bk attorney's and both said I do not have to file, in order for dh to discharge (or whatever the proper term is for what happens in a ch 7 bk) his debts in a bk. All of the debts, except for the house are in his name only. We have no common accounts. I think if we were to get divorced, a Judge might look to split the debt in some way, but I believe as long as we're married, he can file and I can remain unaffected. I thought the same thing as you, but like I said, we checked with two different attorneys, and I've actually spoke personally with a few women who live in the area who have had spouses file, without them having to.

 

Right now, my mid score is around 780. I have 4k on one card and a $255 car payment. I'd like to (and I realize I may be hopelessly optimistic here) short sale without missing any payments. I know the SS will keep me from being a future homeowner for quite some time (I think 2 years is the most recent talk), but if I can keep my score as undamaged as possible, if and when I need credit, hopefully it will be available to me.

 

We've been home owners for 15 years, the McMansion which 'sunk our battleship' is the 3rd home we've owned. We never have made a late mortgage payment in all those years, never even had to pay the after the 15th fine. Life just continues to punch us in the solar-plexes. DH hasn't missed any CC payments either, but is just going to have to file. His min payments are more than he currently earns, and we're about to crash into the rocks... If he could discharge this debt, at least we'd be able to keep up with the rest of our fixed expense (at least I hope so....)

 

Regards,

 

nj2tx

[nj2tx]

Found this link that I thought was interesting. Apparently, the 1st can pay the 2nd no more than $2k to release their lien in the event of a deed-in-lieu. I wonder if that would be attractive? I doubt that 2nds get much more than $1k-$2k in the event of a short sale. (At least that's what I continue to hear.)

 

http://portal.hud.gov/fha/sf/svc/faqdilfact.pdf

[SportsNut]

Found this link that I thought was interesting. Apparently, the 1st can pay the 2nd no more than $2k to release their lien in the event of a deed-in-lieu. I wonder if that would be attractive? I doubt that 2nds get much more than $1k-$2k in the event of a short sale. (At least that's what I continue to hear.)

 

http://portal.hud.gov/fha/sf/svc/faqdilfact.pdf

 

Good work TX.... This guideline is for FHA loans only, but often what is adopted by FHA, conv lenders soon mold it into the guideline that they use; either verbatim or altered somewhat.

 

I have seen 1st pay a 2nd, but that was before the recent down turn in the RE mkt. Back in the good ole dayz, when these foreclosure things weren't quite so prevalent. But, it is worth a try... GL on it.

 

Also hopefully the info you have about the Bk by DH only is accurate, and remain in tact as-is. Hope it works out for you.

[nj2tx]

I noticed in the verbage that it said "HUD" (and as you know mine is not an FHA or conventional loan), but was hoping that with the catostrophic RE environment, lenders might be looking for creative outs. The key word - hoping. Thanks for the well wishes.