Illinois Real Estate Buying and Selling Guide – Real Estate FAQ
This Real Estate FAQ will help you answer your most pressing questions. If you would like to schedule a free confidential consultation, call us at 708-598-5999.
Q. What does it mean to sell real estate in a “Short Sale”?
A. The term Short Sale” refers to a sale of real estate which has one or more mortgages against it, where the total amount due to the mortgage companies or other creditors with liens against the real estate exceeds the amount which the seller is likely to receive for the real estate. To complete the sale it is necessary to get one or more of the mortgage companies, and/or other lien holders to accept payment of less than the full amount which they are owed.
Q. Will I still have to pay the balance due to the mortgage holder or other lien holder after the sale of the real estate if they do not get paid in full?
A. This is the “big” question. Most mortgage will not forgive the balance due on a mortgage after a short sale unless the individual on whose behalf the property is being sold can prove severe financial hardship.
Whether other creditors will forgive the shortfall from the mortgage depends on what type of a deal you or your attorney is able to work out with the creditor. Many creditors will forgive the balance due on their debt in exchange for some payment from a parcel of real estate which is “short sold”.
Q. If a mortgage company or other lien holder forgives a debt from a short sale will the IRS decide the I had income equal to the amount of the forgiven debt and make me pay tax on the amount of debt which is forgiven?
If any creditor forgives the balance due on a debt they are supposed to issue an IRS Form “1099C” and charge you with income in the amount of the forgiven income. Usually only mortgage companies and charge card companies comply with this requirement. You must pay tax on the amount the creditor writes off. For the year 2011, the Federal Tax Law provides that you will not be taxed on mortgage debt which is forgiven after a foreclosure or short sale if the underlying real estate is your personal residence.
If you can prove your were financially “insolvent”, that your liabilities exceeded the total of your assets, at the time any debt was forgiven, you may be exempt from paying the tax on the amount of forgiven debt pursuant to Section 108 of the Internal Revenue Code.
