Will I have to pay capital gains taxes if I sell a property as a short sale?

No. Capital gains would indicate that you are in some way “better off” financially because of money you have made. In a short sale, you lose and owe money.

If I pay mortgage insurance and default on my loan, why wouldn’t that cover the deficiency amount?

In some cases it will and in some cases it won’t, depending on the amount of the deficiency. Usually the mortgage insurance only covers a certain amount.  Moreover, the lender will try to collect from you before filing a claim with the mortgage insurance company. The mortgage insurance is not there for your protection, rather the lender’s.

We had a first and second loan and went through foreclosure. The first was paid off and we were told the second would be forgiven. Now a collection company is coming after us for the second, what do we do?

The bank will never forgive a one-time debt unless it is explicitly stated in writing and you have it reviewed and confirmed by an attorney. Your only recourse is to engage in a legal dispute against them or file bankruptcy.

What are the implications of unpaid deficiency judgments?

A worst-case scenario can result in garnished wages.

How long does the foreclosure process take?

This is a complicated question depending on the definition of “the start” of the foreclosure process.  Generally, the Bank will send a notice of default (NOD) to the Title Company and trustee. Next, the house will go up for auction after three to nine months. During that time, you can pay the delinquent amount to “cure” the foreclosure proceedings.

Will I still have to pay taxes if I do a short sale?

This is a broad question depending on whether we are talking about property taxes or federal income taxes. If the bank sends you a 1099 for the deficiency, you will have to pay the property taxes. Whether it’s you or the lender depends on the lender’s policies and the specific agreement you reach while negotiating the short sale.

I owe more than my home is worth. Am I eligible for short sale or are my only options foreclosure and bankruptcy?

Always consult your lender about your options which are usually short sale, deed-in-lieu of foreclosure, and foreclosure. The banks prefer to prevent foreclosure whenever possible. They have lowered interest rates and payments because of all the new defaults in 2006-07. Either way, your first stop should be to get information from your lender on what options it provides.

If a bank approves a short sale, can they seek a “deficiency judgment” for the difference between the sales price and note balance?

Absolutely.  In Nevada, a non-foreclosing lender has up to 6 years from the date of default to pursue a deficiency judgment.

If a lender forecloses, can the lender still sue me for the “deficiency?”

The lender has up to 6 months from the date of trustee sale to pursue a foreclosed-upon borrower for the deficiency.

Is a short sale still an option if a foreclosure has taken place?

By definition, no. However, it depends what you mean by “taken place” and whether you are the owner or the buyer.  If you are the owner and you have not been evicted yet, there is always a dollar amount called “cost-to-cure” that, if received by your lender, will cure you of default. If you are a buyer, it’s all the same to you.

I want to do a short sale and have a second mortgage, does this make me ineligible?

No. Both of your lenders will need to be satisfied in some way to complete the short sale. If your first lender will be paid off by the sale, then you just negotiate the terms with the second lender.

I purchased a new home in February, with a first loan of 80% and a second loan of 20%. I listed my old home with the plan of paying my second loan as soon as the old home sold. This home has been listed for over 6 months and has not sold and the price has been reduced substantially.  I have been paying for mortgages on both homes.  I am using my savings and I cannot afford to keep paying both.  I cannot afford my new home without paying my second loan.  Can I short sell it?

You and the rest of the country! Yes! You can do a short sale. The problem you face now is time constraints. Talk to the lender on your old house about their options such as deed-in-lieu of foreclosure. Learn about all the lender’s requirements and policies for a short sale.

Will there be any tax consequences to doing a short sale?

Typically, the tax consequences will be less severe versus letting the home go to foreclosure.  If the home is sold at foreclosure auction, you will still receive a 1099-A for the amount the lender lost due to the sale.  In a short sale, most lenders will always give you a 1099-C for the amount they lost due to the short sale if they decide to not seek a deficiency judgment.  In almost every case, lenders will opt to send you a 1099-C for the amount of the loss.  We recommend that you consult with a CPA regarding taxes.  Additionally, you should become familiar with IRS form 982 prior to deciding the pursuit of a short sale.

Why should I do a short sale?  If I am going to have to move anyway, why shouldn’t I just allow the bank to foreclose so I can stay in the house rent free for longer?

The main benefit of a short sale is that, in many instances, you can still stay in your home rent free just as long as if the house were to go to foreclosure and you will still be able to show your mortgages as “paid in full” vs. “strategic foreclosure.”  The amount of loss to the bank is usually less in short sale, thus the amount of the 1099 to the homeowner in a short sale is less.  Either way, you will want to have an attorney dealing with the lender.

If you have a question that we have not addressed above, please contact us.