A quick background. Lender is Wells Fargo. FHA loan. 

 I have been in the short sale program for over a year with an ATP. Had a previous buyer and was just waiting to close. In August, Wells pulled some shenanigans and foreclosed before we could close the sale. Wells bought it back at auction, then the buyer backed out. I was given a 6 month redemption period. Now it's Nov 11 and I have multiple offers on the property. All meeting the minimum price. I was told though, there would be no guarantee that it could close by the end of the year. Understandable. What are the implications, especially 1099/tax implications, if it closes in 2013 with the tax relief legislation having expired? I'm assuming that if they did send me a 1099, it would be for tax year 2013, when the sale occurred. Or would it be 2012 from when they foreclosed? At this point, I'm very hesitant to accept an offer on the property.

 Any help or advice would be greatly appreciated.  


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 They foreclosed in August and bought it back themselves at sheriff's sale. Is the foreclosure recorded at this point, or when the redemption expires? My goal is to be safe and get the 2012 1099, whether that means leaving it as is in foreclosure, and/or waiving the redemption period. 

Speak with a competent CPA familiar with the issue.

 This is what I did find out from a CPA. I all depends! LOL He said there seems to be  no rhyme or reason as to when the lenders issue the 1099-C. In my case, he said it would probably be 2013 if it closed then. Closes in 2012, could be either year. A roll of the dice.What he did say is that if I do go through with the short sale and it closes in 2013, I WILL owe taxes unless the legislation is renewed. Still possible that I will owe if it closes in 2012 if they issued me a 2013 1099. That would take some fighting and further expense all while the IRS has their hand out wanting their money now.

 He recommends to just let it die in foreclosure and not accept any offers. If I get the 2012 1099, I'm covered under the current legislation. If I get a 2013 1099 for the foreclosure, my taxes will be waived by existing permanent tax code because I will be financially insolvent. That exemption under the permanent tax code is only allowed for foreclosures. With no new legislation, after Dec 31, short sales with a 2013 1099 will owe taxes, regardless of financial situation. 

 Not the way I wanted this to end, but since Wells Fargo has been reporting me as already foreclosed on my credit report for over a year, I guess there's nothing to lose at this point. :(

If Wells has already foreclosed on the property your credit report is already showing the FC so what benefit would you have by completing a short sale?  If Wells has recorded a Trustee's deed the property is now NOT owned by you so you could not sign a Warranty Deed to transfer ownership anyway.  Redemption periods are just for "redeeming" the loan, ie, paying the debt in full. Correct? (Utah law does not have a post-FC redemption period). Seems like you are just spinning your wheels at this point.

  Supposedly, in the redemption period, I can still complete the short sale and the foreclosure would be reversed, both on my credit report and the deed transfer. So, they must not have recorded it yet because everything my agent has sent regarding the offers still has me signing as the property owner. But obviously, I have lost trust and faith in my agent or I wouldn't be posting here or seeking other professional advice. Since I asked for a cancellable addendum over a week ago on the high offer, they've ceased communications. I think they're spinning my wheels and at my expense to try to get something out of this after a year and a half. I can't get any info out of Wells either because my agent conveniently sent a cease and desist order to them on my behalf and they will not return calls to me. 

 My credit report started showing the foreclosure about 2 months into the process. About the same time I received the ATP. Wells acknowledged the mistake and never corrected it even after calling every single month about it.

I don't know about the redemption period in your state.  And, I am NOT a CPA but I'm pretty sure your CPA is wrong.

I've briefly read the IRS code on the insolvency issue and had several discussions with CPAs about it.  It does not apply only to foreclosure, but short sales and most types of forgiven debt.  I'm open to correction by someone on this.

Also, you are Assuming the debt will be forgiven with the foreclosure, don't bet on it.  One of the reasons for doing a short sale is to obtain the debt forgiveness.  As for which year the 1099C would be issued, there is no guarantee with a foreclosure.  The 1099C is triggered by when the debt is Forgiven, not when the debt is determined(auctiondate/end of redemption).  In a short sale, not only is the debt forgiven, but the Date of forgiveness is simultaneous(approval letter).

 As far as forgiving the debt on the foreclosure, if you get an ATP for an FHA short sale, and you run it's course with no sale at their appraised price, which ends in foreclosure, the debt is still forgiven under FHA guidelines as long as you fulfill your requirements and do not get kicked out of the program. 

Sorry, didn't catch the FHA implications.  I would like to hear from others on the "insolvency test" for tax liabilities only applying to foreclosures though, if I've missed something.



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