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Old 02-15-2011, 03:29 PM
 
21 posts, read 27,154 times
Reputation: 18

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Without doing enough research, husband and I signed a listing agreement with realtor to short sell our two rental properties. I told her we absolutely would not pay anything over the short sale amount (ie no money back to bank). We went short sale to avoid bankruptcy. Now I find out I will have to pay taxes (1099s) on the forgiven debt, which puts us back into BK territory. Realtor did not apprise us of the 1099 factor.

One house went in contract right away, loan of 203k, in contract for 165k. I agreed to this amount because it is a VA loan, and I said to realtor, that since the VA would pay 36k in insurance, I would accept the contract. Due to a few different reasons, if we short sell, it gives us a tiny window to do our BK 7, to avoid the 1099. Can I just cancel the contract and let the house go into foreclosure status? It will also allow me to file chapter 7 as a non-consumer, but not if I short sale.

Will the realtor and buyer sue me for breach of contract? The closing date is April 30th, and I haven't heard anything from mortgagor re: the short sale , so should I just let the contract ride out and refuse to re-negotiate at that time? Thanks for any advice!
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Old 02-15-2011, 05:23 PM
 
Location: Lakewood Ranch, FL
3,254 posts, read 3,269,571 times
Reputation: 2611
You need to start talking with a real estate attorney. There is liability in an agent's failure to inform you of potential consequences to a short sale but you need to get an attorney now. Having said that, see if your contract has a short sale addendum or language in the contract itself that says the contract is contingent on a) the approval of the lender, and b) your acceptance of the lender's terms. If that is there, you should be OK but you still need to talk with an attorney.
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Old 02-15-2011, 05:42 PM
 
Location: Tempe, Arizona
4,511 posts, read 7,489,447 times
Reputation: 2106
Quote:
Originally Posted by bbronston View Post
...There is liability in an agent's failure to inform you of potential consequences to a short sale ...
My understanding is that it's not the agent's responsibility to give tax or legal advice for a short sale, but rather recommend consultation with a CPA and Attorney to understand the consequences/options.
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Old 02-15-2011, 05:53 PM
 
Location: Maine
2,192 posts, read 3,467,574 times
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There are, I believe, 3 exceptions to paying the tax on the 1099 income, and one is insolvency. Speak with a CPA or attorney ASAP to see what to do. You might be exempt from paying the tax.
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Old 02-15-2011, 06:30 PM
 
Location: Lakewood Ranch, FL
3,254 posts, read 3,269,571 times
Reputation: 2611
Quote:
Originally Posted by rjrcm View Post
My understanding is that it's not the agent's responsibility to give tax or legal advice for a short sale, but rather recommend consultation with a CPA and Attorney to understand the consequences/options.
Everything I've read and all of the training I've had suggests that the agent must 1) inform the seller of the alternatives, 2) inform the seller of possible consequences, and 3) strongly recommend that the seller seek advice from a lawyer and an accountant. As you know, there is liability in everything we do and disclosures and cautions should be in writing and acknowledged by the seller in writing for the agent's file.
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Old 02-15-2011, 06:40 PM
 
404 posts, read 912,658 times
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Quote:
Originally Posted by susieh View Post
Now I find out I will have to pay taxes (1099s) on the forgiven debt, which puts us back into BK territory. Realtor did not apprise us of the 1099 factor.
You should speak to a CPA.... I am not a CPA.

However.... I have spoken to a number of CPA's about 1099's on rental Short Sales and they mentioned that a 1099 may be a non issue.

Example:

You purchase a property for $200K. You short sale the property for $100K.
You get 1099ed for $100K.

Your cost basis is $200K... you sell for $100K..... You have taken a loss of $100K.

The $100K 1099 is "nullfied" by your $100K loss.

Obviously there are other factors you need to take into account (ie. depreciation), but the 1099 may not be that big of a deal.

Let me repeat... I am not a CPA.
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Old 02-15-2011, 07:58 PM
 
Location: Tempe, Arizona
4,511 posts, read 7,489,447 times
Reputation: 2106
Quote:
Originally Posted by bbronston View Post
Everything I've read and all of the training I've had suggests that the agent must 1) inform the seller of the alternatives, 2) inform the seller of possible consequences, and 3) strongly recommend that the seller seek advice from a lawyer and an accountant. As you know, there is liability in everything we do and disclosures and cautions should be in writing and acknowledged by the seller in writing for the agent's file.
Absolutely agree with #3 and written disclosures. But if 1 & 2 include legal and tax advice, that's where I differ. Perhaps it's a regional thing, but our CE classes strongly discourage discussing legal and tax issues. If the OP's agent didn't recommend additional counsel, then that would be a concern.
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Old 02-15-2011, 09:22 PM
Status: "No, I am your favorite agent." (set 5 days ago)
 
Location: South Metro Denver for 25 years
8,668 posts, read 19,313,007 times
Reputation: 4399
This is stuff you could have investigated very easily yourself.

You will be 1099'd for the difference. BK will not resolve your tax issues.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
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Old 02-16-2011, 12:07 AM
 
3,782 posts, read 4,686,140 times
Reputation: 1835
Quote:
Originally Posted by susieh View Post
Without doing enough research, husband and I signed a listing agreement with realtor to short sell our two rental properties. I told her we absolutely would not pay anything over the short sale amount (ie no money back to bank). We went short sale to avoid bankruptcy. Now I find out I will have to pay taxes (1099s) on the forgiven debt, which puts us back into BK territory. Realtor did not apprise us of the 1099 factor.

One house went in contract right away, loan of 203k, in contract for 165k. I agreed to this amount because it is a VA loan, and I said to realtor, that since the VA would pay 36k in insurance, I would accept the contract. Due to a few different reasons, if we short sell, it gives us a tiny window to do our BK 7, to avoid the 1099. Can I just cancel the contract and let the house go into foreclosure status? It will also allow me to file chapter 7 as a non-consumer, but not if I short sale.

Will the realtor and buyer sue me for breach of contract? The closing date is April 30th, and I haven't heard anything from mortgagor re: the short sale , so should I just let the contract ride out and refuse to re-negotiate at that time? Thanks for any advice!
If you are planning to file bankruptcy what difference will the realtor or buyer suing you for commission make?
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Old 02-16-2011, 07:26 AM
 
Location: Lakewood Ranch, FL
3,254 posts, read 3,269,571 times
Reputation: 2611
Quote:
Originally Posted by rjrcm View Post
Absolutely agree with #3 and written disclosures. But if 1 & 2 include legal and tax advice, that's where I differ. Perhaps it's a regional thing, but our CE classes strongly discourage discussing legal and tax issues. If the OP's agent didn't recommend additional counsel, then that would be a concern.
I understand your point but making information available to a seller is not the same as giving them legal advice. Look at it from a hypothetical liability point of view. Situation #1, agent has seller sign a document that describes possible outcomes and consequences AND advises them to talk to appropriate professionals. Situation #2, agent only advises seller to hire an attorney. In both scenarios, the seller decides he/she can't afford an attorney/CPA so he/she doesn't, or they assume that having an attorney handle the closing is the same as hiring an attorney. The short sale proceeds, as did the OP's, and suddenly everything comes to a crash because of the realities of a short sale transaction. NOW the seller hires an attorney and a lawsuit occurs because they claim they were never told about 1099s, etc. Agent #1 can prove that's not true and the case is dismissed. Agent #2 may or may not have a paper that shows that the seller was advised to talk with a professional but the agent may (and probably will) be found to have been negligent in not providing a full informational picture to the seller because the agent has the knowledge and should have assumed that the seller did not. It's not only better customer service but it's an important "CYA" step.
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