Home This information is provided as a general rule.  I do not provide tax or legal advice.  You should consult your accountant or lawyer with any questions about your particular situation. HOPE NOW Alliance--  HOPE NOW is a cooperative effort between counselors, investors, and lenders to maximize outreach efforts to homeowners in distress. Credit Implications A short sale may adversely affect a borrower's credit rating because a lender can report for seven years that a loan has been "settled" for less than it's balance.  Although a lender is unlikely to change what it reports to credit bureaus, a borrower may attempt to negotiate this issue when arranging the short sale or request a letter from the lender detailing any extenuating circumstances surrounding the short sale. One of the primary benefits of a successful Short Sale is avoiding the credit damage of a foreclosure. The damage to your credit done by a foreclosure lives on for years – at least seven years.  Without a doubt borrowers will incur more damage on theirr credit report by going through foreclosure. Typically your credit score will take a plunge between 200 to 300 points.  Short sales have a far less damaging effect on a seller's credit report. Credit scores typically lose between 80 to 100 points. See What is a FICO score? What happens to your credit down the road? It is takes around three years after a foreclosure before a lender will offer a sensible interest rate, whereas for a person who went through a short sale typically waits around 18 months to buy another home at a good interest rate. Salvaging your credit should always be the primary concern when making the decision between a short sale and stopping foreclosure. The savings in interest payments alone should be convincing enough for most people, not to mention your buying power in the near and distant future. Your credit will recover much quicker from the credit dings of a few late mortgage payments, if you keep your other accounts current. So, consider allocating your funds to meet basic necessities (food, utilities, household needs, auto expenses and such) first. Beyond paying for necessities plan to pay other bill to keep as many accounts current as possible Keep “necessary” Accounts Current When deciding which credit bills to pay review the terms of your credit accounts. If you are using a credit card to temporarily pay for necessities, you want to be sure to not jeopardize the availability of that account. A short salevmay be just one part of a larger effort to get through a tough period. We want to help make it possible for your credit to recover quickly. You want to avoid foreclosure – and that I can help with. Tax Implications HR 3648, “The Mortgage Forgiveness Debt Relief Act of 2007”            HR 3648 Q&A             HR 3648 General Information and Provisions           Portions of the following no longer apply as of the passage of HR 3648 on Dec 20, 2007. The tax implications of a short sale also may be so significant that it is not in the owner's best interest to proceed.  The debt forgiven by a lender is generally taxable to the borrower as "debt discharge income"  When a taxpayer receives proceeds from a new loan, those proceeds are not taxable income because there is an offsetting obligation to repay.  However, if the debt is cancelled, there may be debt discharge income. The tax on debt discharge income in a short sale is in addition to any income tax from capital gains the seller may owe.  Even if a seller nets nothing from selling a property in a short sale, the seller may nevertheless owe taxes on both debt discharge income and capital gains. If you are considering a real estate short sale of your home, you should be aware that you may receive a form 1099-C for the amount of the lender's losses. This is considered loan forgiveness in the eyes of the IRS. If you have other assets such as savings and you are not insolvent, you may end up being responsible to pay ordinary taxes on the amount of the 1099-C. If you settle a debt with a creditor for less than the full amount owed, you may be required to report this forgiven debt as regular income, with certain important exceptions. The forgiven debts include money owed after foreclosure or property repossession or credit accounts that you don't pay. There are exceptions noted below. If a lender forgives or writes off $600 or more of a debt's principal (the amount not including interest or fees) must send you and the IRS a Form 1099-C at the end of the year. When you file your tax return for the tax year in which your debt was written off, the IRS will require that you report the amount on the form as income. While you may not have received this form from the creditor, the creditor may have submitted one to the IRS anyway. If you don’t list the income on your tax return and the IRS has the information of the transaction on file, you could get a tax bill or, worse, an audit notice. This could end up costing you more than just the original tax bill. There are several exceptions stated in the Internal Revenue Code. Discharges through the following situations are not taxable as income:   Bankruptcy   If the discharge as debt is inteded as a gift   When the owner is otherwise insolvent (i.e., current liabilities exceed assets, but this exemption only applies to the extent that the liabilities exceed assets).   For purchase money seller financing (but the discharged debt is treated as a reduction in the owner's tax basis)   For qualified real property business indebtedness (but the discharged debt will be treated as a reduction in tax basis).   For qualified farm indebtedness. You should consult a qualified tax and legal counsel to see if these circumstances apply.

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MarieMonroy@MarieMax.com