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If a lender forgives the deficiency the IRS looks at the forgiven portion like "income (debt income)" - but under the mortgage debt forgiveness act there is a cancelation of debt income (CODI) on primary residences until 2012. If you get a 1099, the lender forgave the debt. If they reserve their right to pursue you or want to go to court to try to get some money, they didn't forgive the debt, so there would be no 1099C. It's either or, but not both.
I've never heard of a lender filing an amended return. I think the seller would have a huge lawsuit if that happened. I don't see what good that would do anyone either. You can't get blood from a stone.
Thank you for your replies!
I can always counter on the SS Superstars site!
I agree with Jeff - banks cannot do both.
Harry, I'm trying to understand your post. It seems that your taking it from the position of the lender amending THIER tax returns, and I think I'm taking it from the position of the seller.
Assuming we are only talking about deficiencies and 1099's I think we are on the same page. Again, assuming we are talking about primary residences, this is how it works.
If a seller gets an approval letter and they sold their house for $150,000 and owed $200,000 there is a $50,000 deficiency to deal with. The bank has two options. They reserve their right to collect that money OR they forgive the debt. If they forgive the debt, the homeowner now has debt income of $50,000. If they forgive the debt, they aren't pursuing their legal rights to collect on the debt and the homeowner has it documented in an approval leter. If there is debt income, then the homeowner owes TAXES on that $50,000. The lender generates a 1099C outlining the bad debt ($50,000) - That is sent off to the IRS. Now, we all know until 2012 that debt falls under the forgiveness act and the homeowner doesn't pay taxes.
So let's work in reverse. If the lender reserves their right to pursue the deficiency, they didn't FORGIVE anything. There is no bad debt because they plan to collect on it. They plan on pursuing the homeowner in court and getting a judgment for the remaining amount of the loan $50,000 that wasn't collected. There is no 1099C because they didn't cancel the debt.
Again, I'm looking at it from the homeowner's side. I'm not necessarily disagreeing that the homeowner is absolved from "other" legal obligations, however, the lender can't forgive the debt AND file for a deficiency judgment. You cannot do both. It HAS to be one or the other. Now if the lender amends the tax return 5 years later, then they DIDN'T forgive the debt. The problem is the homeowner has written confirmation that the lender DID forgive the debt and boy, that would be interesting to see.
Great comments! I've enjoyed reading them all. I spoke with my broker - and here in Idaho - they do have up to 5 years to come back and attempt to claim the deficiency apparently - unless they waive it per the approval letter of course. However some investors will not allow that 'language' to be used - no matter how hard we try.
I was just struck by a recent letter I got as it has little info in it - and when asked about it I was told "Even though they don't seek a deficiency if they approve the short sale, the reserve the right to' - nice huh? So I guess it's basically the sellers choice - short sale and hope they don't come after them within 5 years or let the house foreclose and definitely have a foreclosure on your record. BUT she also said that they will receive a 1099-C in January - which lead me to this question in the first place.
Interesting for sure.
A short sale is a settlement of the mortgage or short payoff. The lender issues a satisfaction of mortgage AND releases the seller from further mortgage obligation. Once that satisfaction is filed at the registry the release of mortgage is obtained, and there is nothing where a deficiency judgment can be obtained. Its a satisfaction of mortgage and relase for the borrower. The lender can't go after the deficient portion if they issue a full satisfaction.
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