BiggerPockets

The only way you're going to keep your credit rating intact is to pay the loan in full.

Its not your primary residence, so the lender's going to be less forgiving than if it were. Do you have other assets? Do you have steady income so that you could make payments on a $50K loan? If so, then the lender's going to come after you for the payment. So, rather than a 1099 for the forgiven debt you'll get a deficiency judgment for the $50K shortage.

Now, if you can show you have no assets and no income and can't possibly make up the shortage, they might let you off the hook for some or all of it. I'm guessing that with owning a $700K property in Tahoe or Mammoth, and with a 790 credit score, that's not the case.

AFAIK, the 1099 has no effect on the transaction itself. Certainly, loans do not. Your gain will be the selling price less costs to sell less the basis. Your basis will be your purchase price plus buying costs plus any capital improvements less depreciation (actual or what could have been taken.) Sounds like that will be a negative number. If its positive, you'll owe depreciation recapture up to the amount of depreciation (taken or what could have been taken) and capital gains on the rest. If its negative, you can offset it against other income since you're selling. Not sure if the 1099 is ordinary income or something else.

So, in a sense, you're correct. The loss on the sale may offset some of the phantom income for the forgiven debt.

If you can convince them to accept the short sale, then be sure they agree that the payment they do get is full and final payment. That will (or at least should) avoid the deficiency judgment. But it will ensure you have the short sale on your credit record and that you'll get the 1099.

A conversation with your CPA would be a good idea. At one point you refer to it as a vacation home and another point you say its an investment. If vacation home means a second home, i.e., you used it more than 14 days in a year, it gets a different treatment for taxes than for an investment property.

No direct experience. But in other posts, members have said the impact is the same. 200-300 point drop, maybe more. Supposedly, you can get another Fannie Mae type loan two years after a short sale vs. five years for a foreclosure. Otherwise, about the same hit.

If you do have assets and income, consider offering to do an unsecured loan from the lender to avoid all these issues.

Originally posted by Jon Holdman

No direct experience. But in other posts, members have said the impact is the same. 200-300 point drop, maybe more. Supposedly, you can get another Fannie Mae type loan two years after a short sale vs. five years for a foreclosure. Otherwise, about the same hit.

If you do have assets and income, consider offering to do an unsecured loan from the lender to avoid all these issues.

As you noted Fannie Mae's guidelines as of August 1st show that the impact is considerably less on the credit than an actual foreclosure. It is our experience that we have seen that a short sale really affects the credit in many cases 60-80 points sometimes up to 100 (depends on your credit history and this figure does not include 30,60,90, etc. day lates -- it's better if you are not behind) where a foreclosure is more like 250 points and a bankruptcy in the 300 range. Fannie Mae's guidelines go on to say you'll have to wait 7 years to get funding after filing a BK. The main thing to take from these examples is that many lenders mimic whatever the government is doing.

K Gold, we negotiate for many of our clients and on various occasion have seen even investment properties get off with out a note. We have seen those that do have to take a note it is only for a percentage of what is owed and we have negotiated many on a 0 percent interest rate.

We actually just did one for our client that was a note of 5k for 15 years at 0%. Monthly payment was only 27 dollars! This was on a 120k note.

About the defaulting on the note you take they could look to seek a judgment on you (take you to court) depending on the amount you owe at the time and default and if its worth it.

We would suggest you hire a professional, or a negotiator, or someone who has experience dealing with Hundreds of these. Many agents these days even work with teams because of delicate these cases are.

If you have any questions feel free to keep posting or find a team that could work for you.

Also some lenders will agree to a short sale on investment properties if you can prove you aren't able to afford the added payments.

Lenders are aware that someone in this predicaments will pay their primary mortgage and allow the 2nd home go to foreclosure.