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So for people who find themselves in a very difficult situation considering these options whether it’s a loan modification in a short sale whatever they need to do to relieve themselves of this particular burden of a mortgage that for whatever reason they’re no longer able to maintain, they are not always considering the tax ramifications associated with taking a specific course of action like this example the short sale option Right there is actually two pieces of tax component here you have the forgiveness of debt income that we talked about they still have the fact that he sold your house and you have to see if there was a gain on that Over and above the cost basis of the home We talked about the 1099Cs a few moments ago did you say that the lender sends a copy of the 1099C to the IRS?
Absolutely now I’m the guy for a few minutes ago who bailed $400,000 and sold it for $300,000 and I going to get a copy of the 1099C if I haven’t given my lender my new address Well that could be a problem they will send it to the last address they have on record for you And as a homeowner it’s my problem The IRS will get a copy so they will look for it on your return if you forget to put it on there you’re going to get a friendly notice from the IRS you may not have been a fair question if somebody is going to do a short sale is a fairly civil transaction and when I say civil I mean going for a short sale is horrible for them and their family but it beats the alternative which is foreclosure and I think the real problem is when there’s a foreclosure and the guy just walks away and moves off to El Centro California he’s the one who’s really getting at hurt So in the event that somebody takes a course of action and I know that Velocity financial and Michael Barnes you are not necessarily advocates for that short sale approach.
It’s not normally the best course of action we’ve been talking about loan modifications and it would help me when I talk to clients, or people who call from radio broadcasts who asked questions about loan modification process as part of a financial strategy help me with some of the tax ramifications.
Let’s say that I have a loan and I know the best thing for me is a loan modification am I going to be faced with a 1099? A tax bill at the end of a loan modification? Yes the first of the two tax implications will apply which will be the debt forgiveness part.
I didn’t mean to interrupt you Mike well I said there are several different types of loan modifications I believe, are you asking about when the loan modifications where they actually do forget some of the debt? That is a point I know there’s been a lot of discussion on the use of the TARP funds estimate of a lot from the federal government regarding these banks that qualify for some of these funds they have to do principle reductions for their mortgages.
So let’s say there isn’t a principal reduction involved from that aspect is not a taxable event that could take place, since I’m not reducing my principal I’m simply getting a reduction in my term or my rate That’s right the only time that taxes would come into play is when the principal gets reduced because that is forgiveness of debt So let’s take that one step further whatever mortgage interest I’m able to deduct on my taxes may be impacted if it’s a lower percentage Right because you’ll be paying less interest by there’ll be no surprise that the 1099 coming your way if it is just an interest modification One of the things that I call time from people I try to make things clear that we are trying to do the best we can and then some for you the homeowner so you can stay in your home.
The situation I’m talking about the 400,000 the lender is more likely than not to not going to forgive 100,000 however the same lender is more than willing to reduce your interest rate so that your payment would be the same if they have done the principal reduction because it’s not a permanent loss for the bank.
If there is someone out there who’s telling you that they can have your mortgage reduced by tens of thousands or hundreds of thousands of dollars, it’s not going to happen and I doubt it’s going to happen anytime soon.
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