What's a short sale?

Q: In following real estate news, I have come across the term "short sale." What does this mean? How does it work, etc.? is this another greed angle that will cause more grief for homeowners?

A: Quite the opposite. A short sale in real estate is a sale for less than the amount of the mortgage. The lender agrees to accept the sale proceeds as satisfaction of the debt. It's an alternative to going through foreclosure. The problem is usually convincing the mortgage lender to agree to a short sale.

Note: the interest forgiven is generally taxable income unless the property was the borrower's primary residence. 

Comments

[Helen Huntley]

It's entirely based on what that particular lender is willing to accept. There is no universal policy. Some won't do a short sale at all.
Helen

[ed]

the operative words are "sale for less than the amount of the mortgage"-how much less or is this totally negotiable??? can you comment on this in your blog, HELEN???

[Jonathan Christopher]

Homeowners of a primary residence are not required to pay tax on the forgiven debt anymore. The mortgage debt relief act has exempted homeowners from federal taxes. Always consult a tax pro for confirmation and state tax obligations.
Jon Christopher of Short Sale Way

[Helen Huntley]

Yes, she most likely would receive a 1099 form showing taxable income of $30,000. However, there is a way to get out of paying the tax if she can prove that she was insolvent (her total debts exceeded her total assets)at the time of the short sale. If that's her situation, she should talk to a tax preparer about it.

My daughter is considering doing a "short sale" on her home. She lives in one state and her home is in another,so I believe her home would not be considered her primary residence. How much of the forgiven interest would be taxable income for her on a mortage that she owes $218,000 and her house sells for $188,000? Would her taxable income be the difference of $30,000 or what?