I am of the understanding that the seller is not allowed to received ANY money from the buyer in the case of a short sale.
Is that the case, or just one of those things that people talk about, and never really happens? If I can write up a “subordination agreement for any taxes due”, the guy I just met with (shortsale deal) would be much more at ease. He’s been through a 6 month eviction on his tenant, a foreclosure, a bankrupcy, and now divorce, in a year. He wants to do the deal, but does nothing without his lawyer anymore. Guess what the lawyer might say?
For right now, we have a “dirty arrangement” where I will buy his personal property in the house. He’s only needing a few thousand. The other option is me paying him a few thousand dollars to remove the gopher that drown in the hot tub. Then again, I suppose a dead gopher removal service would need to pay taxes to.
tax consq of sub2 seller if i payoff his 2nd t/d - Posted by nigel(oh)
Posted by nigel(oh) on November 07, 2002 at 23:38:17:
bank took my $2,500 and forgave $15,000 2nd of the seller. do i have to disclose to the seller that the difference [$15K - 2500]could be a potential income on his part if the bank gives him a form 1099 at the end of the year? am i obligated to let him know about this? this is my first subject to deal and i really want to do this right. thank you in advance.
Based on your description, it is difficult to tell whether you:
offered a “Short Sale” to the lender, and paid less than owed on the mtg…
OR
Offer to purchase the mtg at a discount.
The tax treatment to the Seller is way different between the two above options. In the case of #1, the Lender should issue a 1099-A for the $ 12500. In # 2, there is NO tax consequence to the Seller, hence NO 1099 issued.
So be clear on what event occurred. If it was a Short Sale, then I think you are obligated to mention to them, and have them sign a disclosure that states they concur and understand the possible tax implications.
Re: Short Sale vs. discount purchase of mtg - Posted by nigel(oh)
Posted by nigel(oh) on November 08, 2002 at 14:59:50:
forgive my lack of knowledge, would it still be considered a short sale even if the 1st t/d stays in the seller’s name? we’re trying to avoid him getting foreclosed on. so 2nd is done, now i’m working on the payments on the 1st that’s delinquent. thanks to everybody for helping out.
Re: Short Sale vs. discount purchase of mtg - Posted by Dave T
Posted by Dave T on November 08, 2002 at 10:15:01:
JT,
Let’s assume that the lender accepted a short sale, and that Nigel did not really purchase the second at a discount.
Since Nigel took the property subject to the existing notes, then obtained a discounted payoff on the second, why isn’t the discount considered income to Nigel (understanding that the loans are still in the seller’s name)?
First thing of note… Is this property located in Ohio…? If so, then it is not a Trust Deed, but a Mtg… 1st, 2nd, 3rd, 10th Mtg. If it is located in a Trust Deed state, then I apologize for jumping to conclusions here.
Since the proeprty may not be selling, then it is not a Short Sale. What you are referring to now sounds like a “Forebearance Agreement”. This is an agreement whereby the Lender agrees to a “Workout Plan”, in which the Owner would make all current payments on the loan, plus some percentage of the arrearage payments each month. Usually in this instance the Lender will not foregive, but restructure debt, and a sale is not generally involved.
You say… “we’re trying to avoid him getting foreclosed on. so 2nd is done”.
This statement troubles me, as I cannot totally associate it to mean anything… Are you saying that you have bought out the 2nd…? Doesn’t seem that that would be wise, so probably not. Are you saying that because of the Foreclosure the 2nd mtg goes away…? Only if the foreclosure goes full cycle and the sale occurs. However, if you save it from Sale, then the mtg still exists.
Clear this up for me… what are you saying here. I just want to be certain that you are not operating on some obscure understanding this is off base… and could cost you some sleep… and big bucks here.
My guess is that the one who is “contracturally responsible for the debt” is subject to receiving the 1099, which is not the Buyer in a Sub To. Since there is no formal assumption agreement in the “Subject To” transfer, this does not obligate the Buyer for the debt.
In a perfect world… for the Seller, they would legally obligate the Buyer and make a subordination agreement for any taxes due, as a result of any debt foregiveness to the Seller/Borrower. That way the Seller/Debtor could recoup any tax obligation from the Buyer.
However, as we know, these folks are not generally worried about this aspect, nor are they in the drivers seat as far as negotiating strength.
Short Sale is “Debt Foregiveness” by the Lender/Creditor to the Owner/Debtor, which creates a taxable event, in the eyes of the IRS. Taxable occurs due to a financial gain… e.g. One day you owe 10K, the next day you owe 2K… hence you were financially favored 8K… The same as receiving 8K income, and that consideration is taxable, even though you did not actually receive 8K in hand.
Purcahsing Debt at a discount… (or at Par value, for that matter), is a transaction between the buyer of the debt (Investor), and the Creditor/Lender. This in no way involves the Owner of the property. Now if you buy the debt as an investor, and later give debt relief to the owner, (as we would traditionally do in a RE purchase deal), then you would responsible for 1099’ing the Seller, as you are now forgiving debt to the Debtor. Hence, they are still receiving the gain of debt foregiveness… and it is taxable.
Re: Short Sale vs. discount purchase of mtg - Posted by nigel(oh)
Posted by nigel(oh) on November 11, 2002 at 17:26:19:
i’m sorry for not making things clear. fmv of property is around $205K. 1st & 2nd are both in default. balance on first is $184,500 (plus about $6,400 in late pymts) and $15,000 for the 2nd (inlcuding late pymts). 2nd is now taken cared of because bank agreed to settle the loan for $2,500. i’m working on getting the 1st current by paying the arears and making the monthly payment. owner agreed to sell the property to me doing subj 2. i’m from dayton but property is in springfield, mo. it’ll be rental for a year or two until my family is ready to move in there.
jt, thanks again for your willingness to help. sorry i wasn’t very clear in the beginning.