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ScottyMacESQ, Lawyer
Category: Real Estate Law
Satisfied Customers: 16344
Experience:  Licensed General Practice Attorney, Texas
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My bank has approved a short sale of my house in Ohio. The

Customer Question

My bank has approved a short sale of my house in Ohio. The difference between the sale price and the balance on my mortgage is $30,000. Will I owe income taxes on the difference? If I file for bankruptcy, will it make any difference?
Submitted: 1 year ago.
Category: Real Estate Law
Expert:  ScottyMacESQ replied 1 year ago.

Thank you for using JustAnswer.

I assume that the provisions of the short sale specifically state that they waive any claim to a deficiency (a difference between what is owed and what will be paid by the buyer)?

Expert:  ScottyMacESQ replied 1 year ago.

And is this a short sale on your personal property? Or is it a second home, investment property, or business property?

Is the mortgage at issue a purchase-money mortgage, or is it a home equity loan / refinance / etc...?

Customer: replied 1 year ago.
It was my residence until I moved to Florida last July. The first mortgage was a refinance to get a lower interest rate. The second mortgage was to consolidate other debt.
About waiving a claim to any deficiency: I haven't seen it in writing, but I was told verbally that was the case.
Expert:  ScottyMacESQ replied 1 year ago.

Both would be included in the short sale, though, correct? How much is owed on the second mortgage?

Customer: replied 1 year ago.
About $20,000 on the second mortgage. The bank has already gone to court for this.
Expert:  ScottyMacESQ replied 1 year ago.

How do you mean? You mean that they've gotten a judgment, or has the bank dropped the matter after bringing it to court?

Customer: replied 1 year ago.
I received a notice from the court that the bank filed suit seeking a judgement against me for the balance of the second mortgage.
Expert:  ScottyMacESQ replied 1 year ago.

Apologies for the delay. When you responded I was out of the office and I've been out all day. I was in and able to chat when you first asked the question, but the >2 hour delay in the last response just meant that I was not able to be in to respond to you.

Is it the same bank that owns both mortgages?

Customer: replied 1 year ago.
Sorry also for my delay. I see clients on a tight schedule which gives me very little down time.
Yes, the same bank holds both mortgages.
Expert:  ScottyMacESQ replied 1 year ago.

Thank you for that additional information.

Unfortunately, yes, this would be considered as "forgiveness of debt" income, which you'd typically need to pay income taxes on. Now if that debt is discharged in bankruptcy, then you would not owe taxes on it.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief. But note that it has to be a purchase money mortgage on a primary residence, and it doesn't seem like yours would count.

Again, bankruptcy could be an option to discharge the debt without income tax implications. But it has bankruptcy implications. That is, it stays on your credit for 10 years (as opposed to 7 for a short sale). It's generally more complicated, and you're going to have to pay court fees, attorney fees, etc... to file that. I'm not saying that you shouldn't, but it's something that you should consider that it's not a simple solution.

Hope that clears things up a bit. If you have any other questions, please let me know. If not, and you have not yet, please rate my answer AND press the "submit" button, if applicable. Please note that I don't get any credit for the time and effort that I spent on this answer unless and until you rate it positively (3 or more stars). Thank you, ***** ***** luck to you!

Expert:  ScottyMacESQ replied 1 year ago.

Did you have any other questions before you rate this answer?

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