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SHORT SALES
Tax implications in a short sale The Economic Stabilization Act extends the Mortgage Forgiveness Debt Relief Act to 2012. Up to $2 million forgiven debt of a taxpayer’s principal residence is exempt from taxation due to this Act. It also includes refinancing to the extent of the original debt (not any cash that was taken in the refinance). For tax years 07 - 12, the government is waiving any tax liability on this forgiven debt. The lender will send you and the IRS a 1099-C "Cancellation of Debt". You or your accountant then files a Form 982, which can be downloaded from http://www.IRS.gov. Be aware, that forgiven debt on vacation homes, investment and rental properties may be taxable, unless you can prove insolvency. Give this information to your accountant when completing your tax returns. This section is not intended to give tax advice. It is advisable to confirm the current tax laws with each case with your tax advisor.
Credit implications of Short Sale, Foreclosure, and Bankruptcy The number one reason a distressed homeowner should proceed with a short sale is to protect their ability to obtain financing in the future. Most short sales result in a "settlement" status on their credit report as opposed to "foreclosure". Fannie Mae and Freddie Mac guidelines are much more favorable to borrowers with short sale on their credit report, typically allowing a borrower to obtain financing for a new home within 18 mo–2 yrs. In sharp contrast, a foreclosure remains on a credit report for seven years, making it very difficult to finance another house, a car, open a new business, or even qualify for credit cards. Any loans received will most likely bear very high interest rates. If the homeowner gets through a short sale with only being delinquent on their mortgage a month or two, the impact is very minor. Again, in sharp contrast, foreclosures have a devastating effect on credit history, job security, employment opportunities, security clearances, military and law enforcement careers, and the most serious of all - the ability to purchase a home in the future. Also, a foreclosure becomes public record, which is searchable by anyone, and can never be removed. A Short Sale offers a fresh start, eliminating debt, while minimizing damage to credit and avoiding eviction proceedings. Bottom line: the end result of a short sale is minor and temporary when compared to the long-term consequences of a foreclosure. Missouri is a deficiency state which means the banks are entitled to pursue any homeowner after a Foreclosure for the deficiency (what they lost due to foreclosure) which includes legal fees, foreclosure costs, liquidation costs, property maintenance costs incurred until property is sold in the REO market which can easily equate to several hundred thousand dollars depending on the property. Bankruptcy that covers all debts - mortgage, credit cards, auto loans, etc typically get hit with large declines of 355 to 365 points to the credit score -- the scoring equivalent of a nuclear bomb – and remain on the borrowers' credit bureau files for 10 years. *Information given from a third pary. All information herin has not been verified and is not gauranteed.
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