How to make a buck off short sales

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<p>It would be interesting to find out. Do lending laws that protect home owners under foreclosure for purchase money loans actually also have protections from the IRS. If they do not, then the law is flawed and does not achieve what it was designed to do.... namely prevent bankruptcy for those families undergoing foreclosure. It pretty much goes without saying that if a family stipped of all of their assets, liquidity and credit rating in a foreclosure will not be able to pay the IRS bill. This is why I am curious.</p>

<p>Question for Irvine Renter and / or Graphix (who seems to have gotten it). : In your initial point about "no 1099 being issued". What was your point exactly? I didn't see the angle that you were going for, other than the buyer who seems to have avoided being taxed on the losses, even though there was a Second Trust Deed piggybacked on the FTD. Can you explain what you were getting at? </p>
 
NickStone,





I actually started this post a bit tongue-in-cheek; however, there is a real opportunity to make money here. When banks don't issue a 1099, it doesn't mean the FB did not get debt relief; therefore, the FB does owe money to the IRS. Without the 1099, the IRS will not know they are owed money, so reporting these people is the only way the IRS would ever find out about the debt relief and taxes owed. None of these FB's are going to report this income even though they are required to do so by law. Particularly if the had a short sale, they are not going through bankruptcy, and the are emerging relatively unscathed. Basically they are avoiding their responsibilities to both the lender and the IRS. That bothers me. Remember, the FB has not avoided taxation, they have only avoided being reported.
 
<p>NickStone - There is no protection from the IRS. The only way that you would legally avoid the tax is if at the time of foreclosure or short sale you were insolvent. So if you were stripped of your assets, liquidity and credit you would not have to pay the tax.</p>

<p>The 1099 point is that the lender should send one to the IRS and the former owner. Even if they do not send a 1099 and they are not insolvent they are still liable for the tax. The IRS wants their money even if a form was not filed. I have done consulting work in the past and not all the companies sent me a 1099 for the income I received but to be safe I declared the income. Legally I was supposed to and if I didn't and I got audited and the IRS found that income 1099 or not they would want their cut. So if someone goes through foreclosure and there is a loss for the lender they need to file that on their taxes regardless of whether or not they got a 1099. If you didn't read the link Irvinerenter added <a href="http://www.housingbubblecasualty.com/">http://www.housingbubblecasualty.com/</a> read how the guy didn't get a 1099. Guess what? We could turn him in to the IRS and he would have to pay the tax and the IRS would pay us a reward for it. After all that babble I think that is what you were looking for. Am I right?</p>
 
<p>IrvineRenter,</p>

<p>My CPA said something similar to what you wrote. In the case of frauds where the buyer recieved income from the seller, this income is not taxable; however, this income lowers the cost basis of the home.</p>
 
<p>Yep. I now get it. One of the other threads actually showed the link for the IRS whistleblower form to turn these people in, and the rules surrounding it. The main one is that you have to give your name, which they keep confidential... which of course makes sense since the IRS would have no idea who to send the payment to in an anonymous situation.</p>

<p>I would imagine that it is only a matter of time before the idot Casey Serin on <a href="http://www.iamfacingforeclosure.com">www.iamfacingforeclosure.com</a> is turned in. He is responsible for a WHOLE BUNCH of violations, including taking too much money back on a purchase, misrepresentation of income, etc. On one of these sites the FBI actually posted a link to their website which showed "Misstatement of Income on a Signed Document is a Federal Crime." This will probably come out much more as the Alt-A loans fail, which of course is a bit silly, since stated income loans are basically called "liars loans", as you well know.</p>
 
<p>Wow, I think this might backfire on the IRS. But then again, I bet they are all for building a bigger empire. When this happens to me, I HUNT down a 1099 form so that I can keep it above board. I guess I'm just way too honest.</p>

<p>-bix</p>
 
<p>For anyone who is interested, the tax consequences of a short sale differ dramatically depending on whether the loan in question is recourse (lender has the ability to pursue the borrower personally in addition to foreclosing on the collateral) or nonrecourse (lender's remedy is limited exclusively to foreclosing on the collateral). If the loan (or loans) in question is nonrecourse, the borrower/seller will not recognize any taxable income (for federal income/IRS purposes) on the short sale, assuming that the borrower/seller's adjusted tax basis in the property equals or exceeds the outstanding amount owed on the mortgage loan. Generally, for tax purposes your adjusted tax basis will equal the amount paid for the property, including amounts borrowed to purchase the property and down payments if any ("cost basis"), plus the cost of any improvements made to the property. The borrower/seller's gain/(loss) is calculated as follows: amount realized (which in a true short sale can generally be assumed to equal the outstanding amount of the mortgage loan) less - adjusted tax basis in the property (See Treas. Reg. 1.1001-2(a) and the Tufts case). In the case of property utilized as the borrower/seller's principal residence (and thus not depreciated for tax purposes), the borrower/seller's adjusted basis in the property will usually equal or exceed the oustanding amount owed on the mortgage (assuming of course that the borrower/seller hasn't taken out additional non-purchase price nonrecourse loans against the property). Thus, a short sale for a nonrecourse borrower will typically result in a short-term or long-term capital loss. Unfortunately, since the loss relates to personal property it is not deductible against the borrower/seller's other taxable income for federal income tax purposes under IRC Sect. 165(c). In addition, the borrower/seller will typically have claimed the home mortgage interest deduction, listed the home's address on their previous individual tax return(s) as their principal residence, and not depreciated the home (as referenced above) so it would be difficult to argue that the home was held for investment and that the loss should be deductible. If the short sale property was actually being rented at the time of the short sale, than the loss should be deductible for federal income tax purposes. However, in this case depreciation deductions previously taken by the borrower/seller on the rental property may have reduced their adjusted tax basis below the oustanding amount of the mortgage loan (the amount realized), in which case the short sale may result in taxable gain to borrower/seller. In this case, IRC Sect. 121 (the 2/5 principal residence exclusion- $250,000 for single/$500,000 joint) even if applicable (i.e., principal residence converted to rental property) would not shelter any gain attributable to depreciation deductions taken by the borrower/seller. </p>

<p>The borrower/seller will only recognize taxable income (discharge of indebtedness income) on a short sale if the mortgage loan(s) in question are recourse. In which event, the difference between the amount paid to the lender via the short sale, and the outstanding amount owed on the recourse mortgage loan, would be taxable income to the borrower/seller. This amount would presumably be reported on a 1099, and the lender would want to report this amount so as to secure a tax deduction for the amount of the bad dent.</p>

<p>I hope this helps to generally explain the tax ramifications, but it is not intended to be utilized as tax advice for planning purpose and/or the avoidance of penalties,etc. You should consult your own tax advisor to specfically determine if your loan(s) are nonrecourse or recourse and what your specific tax consequences would be.on any planned short sale. </p>
 
<p>Just because the borrower did not receive a 1099 does not mean it was not issued. The lender is required to issue the 1099 on relieved debt and it is highly unlikely that a lender would not.</p>

<p>If you turn someone in for tax fraud, it is very likely that you will be audited also.</p>

<p>There are enough loopholes in the IRS tax fraud code that few whistleblowers are ever able to actually collect.</p>
 
<p><em>"If you turn someone in for tax fraud, it is very likely that you will be audited also"</em>.</p>

<p>Woooooo, count me out !</p>

<p> </p>
 
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