Seller's 1099 Concern Prohibiting Her From Doing A Short Sale

Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes

Hi All. I have a seller who doesn't want to go through the process of short selling two abandoned investment properties because they don't want to get a 1099 from the lender and pay taxes on the forgiven debt.

What can I say to her to assuage her concerns? The properties were NOT her principal residence.

I would like to let her know that her bigger concern should be a deficiency judgment against her primary residence should the lender decide to pursue one? Are lenders pursuing more of these lately?

Also, there's the personal liability of someone getting hurt in or on the property which again could turn into a lawsuit and judgment against her personal assets.

Plus isn't there a possibility that the 1099 can be negotiated away during short sale negotiations?

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Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

13y

In your area, can a deficiency judgment occur after the sheriff sale? If so, then there is no way to avoid it happening by doing nothing - so it makes sense to try to get more for the property to lower the deficiency amount. The 1099C could occur in either scenario if that is the case.

Does this seller have assets other than the two properties here that might be targeted by the lender to cover that deficiency amount?

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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
That's life! Is she behind on payments to do a short sale? Gotta take the bad with the good, what's the alternative? :)
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Ibrahim Hughes
OP
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
13y
@Bill Gulley I agree - I think it's an informed vs. uninformed issue. We'll take one more crack at it and see if we can get them to understand the (possible) consequences of doing nothing.
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
In your area, can a deficiency judgment occur after the sheriff sale? If so, then there is no way to avoid it happening by doing nothing - so it makes sense to try to get more for the property to lower the deficiency amount. The 1099C could occur in either scenario if that is the case.

Does this seller have assets other than the two properties here that might be targeted by the lender to cover that deficiency amount?
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y
Ibrahim, have her talk to a CPA familiar with the insolvency issue, form 982, and how the gain/losses are treated with a short. She may no, or very little taxable gain. Also, the same tax liablity will occur with the foreclosure, if they don't pursue the deficiency. The issuance of a 1099 is not a negotiable item with the lender.
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Ibrahim Hughes
OP
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
13y
Originally posted by Steve Babiak:
In your area, can a deficiency judgment occur after the sheriff sale? If so, then there is no way to avoid it happening by doing nothing - so it makes sense to try to get more for the property to lower the deficiency amount. The 1099C could occur in either scenario if that is the case.
Does this seller have assets other than the two properties here that might be targeted by the lender to cover that deficiency amount?

@Steve Babiak

- They have a primary residence that they own.
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Ibrahim Hughes
OP
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
13y
Originally posted by Wayne Brooks:
Ibrahim, have her talk to a CPA familiar with the insolvency issue, form 982, and how the gain/losses are treated with a short. She may no, or very little taxable gain. Also, the same tax liablity will occur with the foreclosure, if they don't pursue the deficiency. The issuance of a 1099 is not a negotiable item with the lender.

@Wayne Brooks Are you saying that even with a foreclosure they're likely going to get hit with either a deficiency judgment (which are allowed in NJ) or a 1099? And didn't know that the issuance of a 1099 wasn't negotiable so thanks much for the info.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y
yes, after a foreclosure if they "forgive/waive" the debt (choose not to pursue it) it is forgiven and unpaid just like with a short sale. The bank by law must report forgiven debt, just like they report interest paid to customers.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
If they can show as Wayne says that liabilities exceed assets then using the insolvency form could make sense to wipe out or greatly reduce the phantom income.

Their CPA would be the best bet to go over such a scenario to see what their liability would be.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Originally posted by Ibrahim S:

Originally posted by Wayne Brooks:
Ibrahim, have her talk to a CPA familiar with the insolvency issue, form 982, and how the gain/losses are treated with a short. She may no, or very little taxable gain. Also, the same tax liablity will occur with the foreclosure, if they don't pursue the deficiency. The issuance of a 1099 is not a negotiable item with the lender.

@Wayne Brooks Are you saying that even with a foreclosure they're likely going to get hit with either a deficiency judgment (which are allowed in NJ) or a 1099? And didn't know that the issuance of a 1099 wasn't negotiable so thanks much for the info.

@Ibrahim Hughes ,

They need to figure out if they are insolvent (negative net worth). If so they will not have to report the cancellation up to the amount of insolvency.

A deficiency judgement could be a possibility in either case depending upon what happens in the short sale negotiation.

Second, they do also have to report the sale, based upon the foreclose. I highly recommend it be reported by adding the 1099 of cancelled debt to the short sale price when they file their tax return.(Unless it can be excluded through insolvency).

Those are the preferred ways to exclude the debt.
[email protected]224-381-2660
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Phil Z.
Real Estate Broker · Orange, CT · Member since 2013 · 951 posts · 218 votes
12y
1099 = 100% deficiency owed and probably a much higher deficiency total

Short Sale = Pay 20-30% taxes on the income, or maybe non at all if they are insolvent. Have them talk to their accountant.
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Ibrahim Hughes
OP
Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
12y
Thanks alot @Steven Hamilton II and @Phil Z. . Great info!
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Originally posted by Phil Z.:
1099 = 100% deficiency owed and probably a much higher deficiency total

Short Sale = Pay 20-30% taxes on the income, or maybe non at all if they are insolvent. Have them talk to their accountant.

Phil, I think you had a typo.

A 1099 issued=debt is forgiven, No deficiency possible.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
12y
Originally posted by Phil Z.:
1099 = 100% deficiency owed and probably a much higher deficiency total
Short Sale = Pay 20-30% taxes on the income, or maybe non at all if they are insolvent. Have them talk to their accountant.

@Wayne Brooks ,

@Phil Z,

Either way if it is her primary residence then no definiciency unless she owed over $2 million in principal.
A 1099-C is still subject to insolvency and other certain exclusions.
[email protected]224-381-2660
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Edward Synicky
Rental Property Investor · Yorba Linda, CA · Member since 2012 · 336 posts · 69 votes
12y
Along these lines does anyone have a feel for which lenders are more aggressive than maybe others. How often is a deficiency judgement actually pursued after a short sale? Is it possilbe to get the lender to waive their right to chase after your other assets as a function of the short sale process and agreement?
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
The overwhelming majority of short sales include a deficiency waiver. If the waiver is not given, the owner doesn't have to accept it. Generally, only some second mortgages, bought by some collection type companies, won't waive the deficiency.
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Edward Synicky
Rental Property Investor · Yorba Linda, CA · Member since 2012 · 336 posts · 69 votes
12y
Wayne my friend, thanks for the info, that makes sense
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