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Permalink Reply by Smitty on February 17, 2012 at 10:10am

1099C is only for "forgiven debt" - If Aurora is saying they reserve their right to pursue the deficiency, they did not forgive the debt, therefore, no 1099C

I don't always think that if a lender reserves their right to pursue a homeowner, that it's a bad thing on an investment property, because if the debt IS forgiven and the homeowner is not insolvent, they will owe taxes on the forgiven portion.  If the lender reserves their rights to pursue the homeowner in court, a 1099 C is not issued to my knowledge.  AND it doesn't necessarily mean they WILL pursue a homeowner in court.

 

What language is used in the approval? 

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Permalink Reply by Joseph Alfe on February 17, 2012 at 10:25am

1- Lenders do not have to forgive anything

2-if they issue a 1099C, they waive collection rights, so deficiency no longer applies-verify with attorney

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Permalink Reply by Bryant Tutas on February 17, 2012 at 2:27pm

Bibi. you will get many conflicting opinions on this. My opinion is that the issuing of a 1099c has ZERO  to do with whether or not the lender can go after a deficiency in the future. All the 1099c means is that the lender wrote off a bad debt that year for tax purposes and therefore the borrower benefits and has to claim the amount as income. But certainly if the lender is able to collect some of the debt in the future they can amend their tax return and claim as income the money collected. Wouldn't you think?

Stating that the issuing of a 1099c is waiving the right to collect on a deficiency is negligent. There is no law or IRS ruling that states this that I am aware of. If there is I would love for someone to share it. If there isn't........well you come to your own conclusion.

The seller should seek tax advice form a competent tax professional. And make sure that tax professional can back up his opinion.

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Permalink Reply by Joseph Alfe on February 17, 2012 at 2:57pm

Bryant, it is accepted legal opinion that if the creditor issues the 1099C, that collection rights are waived due to the "double dip" rule.  basically, if the lender gets to write off the loss against it's revenue, the IRS will not allow them to also collect from the seller, thus the double dip. As always, consult with an attorney, but there is enough published out there by prominent attorneys in the short sale arena to make me confident to believe it.  As with any tax rule, it is subject to change.

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Permalink Reply by Bryant Tutas on February 17, 2012 at 8:03pm

Hi Joseph.There are opinions on both sides of the fence. Even the IRS is not clear on the issue. So I would be very hesitant to state it as fact that the lender can't do both. IRS filings are redone all the time. I guess the future will tell.

My other thought would be that there may be several entities in the short sale process that have deficiency rights. Does this mean you would need to receive multiple 1099c s?

I feel it is still very much a grey area. But I do hope you are right. Our best bet when asked the question by a seller is to just play numb and direct then to their legal and tax professionals.

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Permalink Reply by Bibi Zanella on February 18, 2012 at 5:05am

Thanks so much to all that contributed to my post - it was most helpful! My client would like to see the verbiage"Lender releases client from all Liability" on the approval letter and Aurora won't add the verbiage. Client is insolvent but still concerned that Lender will pursue a deficiency judgement and I've advised him to consult a tax and legal expert.

Smitty, Lender did not include the language that they reserve the right to pursue a deficiency. The language that was used in the Approval was: "If the Short Payoff amount is remitted to us, Aurora Bank will: file a 1099-C form with the IRS and send you a copy and release your mortgage on the Public Records. Report your transaction to the Credit Bureaus as PAID IN FULL FOR LESS THAN THE FULL BALANCE"

It is my understanding that if a Lender issues a 1099-C and writes off the debt, they cannot in addition, pursue a deficiency judgement.  Has anyone had any experience to the contrary? Thanks again for all your contributions.

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Permalink Reply by Smitty on February 18, 2012 at 7:47am

They key here is "PAID IN FULL FOR LESS THAN THE FULL BALANCE"  If the account is paid in FULL then there is no deficiency.  The 1099 is on the forgiven debt only.  Now can they forgive a PORTION of the debt? Sure, so let's say the homeowner owes $250,000 and sells for $200,000, they can forgive $25,000 and pursue $25,000, but then it would not be PAID IN FULL.  It would be a PARTIAL PAYMENT.

Here's the thing.  I agree with Bryant too.  A lender CAN ammend a tax return, but I have never heard of that happening, AND considering in the approval the lender has clearly stated what they intend to do, if the lender went back and reneged the agreement, I would think the homeowner has a heck of a lawsuit.

 

They can release the lien, but not the debt.  If they are releasing the DEBT (PAID IN FULL) then there is nothing left to go after later.

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Permalink Reply by Bibi Zanella on February 21, 2012 at 1:23am

Thank you so much Smitty!  You and the others that have contributed and continue to contribute to this forum have been extremely helpful. Thanks again.

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