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So for people who find themselves in a very difficult situation considering these options whether
it's a loan modification in a short sale whatever they need to do to relieve themselves of this particular
burden of a mortgage that for whatever reason they're no longer able to maintain, they are not
always considering the tax ramifications associated with taking a specific course of action like this
example the short sale option
Right there is actually two pieces of tax component here you have the forgiveness of debt income that
we talked about they still have the fact that he sold your house and you have to see if there was a gain
on that
Over and above the cost basis of the home
We talked about the 1099Cs a few moments ago did you say that the lender sends a copy of the 1099C to
the IRS? Absolutely
now I'm the guy for a few minutes ago who bailed $400,000 and sold it for $300,000 and I going to get
a copy of the 1099C if I haven't given my lender my new address
Well that could be a problem they will send it to the last address they have on record for you
And as a homeowner it's my problem
The IRS will get a copy so they will look for it on your return if you forget to put it on there you're
going to get a friendly notice from the IRS
you may not have been a fair question if somebody is going to do a short sale is a fairly civil transaction
and when I say civil I mean going for a short sale is horrible for them and their family but it beats the
alternative which is foreclosure and I think the real problem is when there's a foreclosure and the guy
just walks away and moves off to El Centro California he's the one who's really getting at hurt
So in the event that somebody takes a course of action and I know that Velocity financial and
Michael Barnes you are not necessarily advocates for that short sale approach. It's not normally the
best course of action we've been talking about loan modifications and it would help me when I talk to
clients, or people who call from radio broadcasts who asked questions about loan modification
process as part of a financial strategy help me with some of the tax ramifications. Let's say that I have a
loan and I know the best thing for me is a loan modification am I going to be faced with a 1099? A
tax bill at the end of a loan modification?
Yes the first of the two tax implications will apply which will be the debt forgiveness part.
I didn't mean to interrupt you Mike well I said there are several different types of loan modifications I
believe, are you asking about when the loan modifications where they actually do forget some of
the debt?
That is a point I know there's been a lot of discussion on the use of the TARP funds estimate of
a lot from the federal government regarding these banks that qualify for some of these funds they have
to do principle reductions for their mortgages. So let's say there isn't a principal reduction involved
from that aspect is not a taxable event that could take place, since I'm not reducing my
principal I'm simply getting a reduction in my term or my rate
That's right the only time that taxes would come into play is when the principal gets reduced because
that is forgiveness of debt
So let's take that one step further whatever mortgage interest I'm able to deduct on my taxes
may be impacted if it's a lower percentage
Right because you'll be paying less interest by there'll be no surprise that the 1099 coming your
way if it is just an interest modification
One of the things that I call time from people I try to make things clear that we are trying to do the best
we can and then some for you the homeowner so you can stay in your home. The situation I'm talking
about the 400,000 the lender is more likely than not to not going to forgive 100,000 however the same
lender is more than willing to reduce your interest rate so that your payment would be the same if they
have done the principal reduction because it's not a permanent loss for the bank. If there is someone out
there who's telling you that they can have your mortgage reduced by tens of thousands or hundreds
of thousands of dollars, it's not going to happen and I doubt it's going to happen anytime soon. You are
listening to the velocity of money for more information call (480) velocity, we will be right back