Will You Still Owe Money After a Short Sale?

The homeowners may still owe the difference between the mortgage balance and the discounted short sale amount as the result of a deficiency judgment. The best short sales will be ones where the bank accepts payment in full without pursuing a deficiency judgment. The difference between the mortgage balance and the short sale may be declared as income on their income tax return by means of an IRS form 1099.

The 1099 form is given to the homeowners as a result of income they’ve received on paper as a result of a short sale. In situations where the bank accepts a $50,000 sale on a $100,000 mortgage, it is the same as if the sellers had actually made $50,000 on the deal and the 1099 will reflect that amount. This can have adverse affects on tax brackets, credit ratings and may even cause IRS penalties too. The bank has the right to seek a deficiency judgment for the shortage on the actual amount received versus the amount that was due. In the above example, the judgment recorded against the homeowners would be $50,000.

In cases where the homeowners can prove financial hardship, it is possible to ask the bank to waive its right to a deficiency judgment. In cases where the bank does pursue a deficiency judgment, the homeowners can still file for bankruptcy at a later date in order to remove the judgment. However, the lender cannot pursue a deficiency judgment against a homeowner and issue a 1099 at the same time. The lender must choose one option or the other, not both. If the lender agrees to waive the deficiency as a condition of a short sale, the homeowners can rest assured they will eventually be receiving a 1099 in the mail. The best option for most homeowners considering a short sale is to deal directly with the lender whenever possible.