Mike’s Real Estate Show

I spoke with a listing agent and he is rather exasperated as he cannot get the seller to a short sales transaction to return his calls. The Seller has 5 properties total which are all in foreclosure!! My take on the transaction is the Seller is asking for “debt relief” and is realizing if s/he goes forward with all the short sales on the properties the capital gains due to the “debt relief” may be just toooooo daunting! “Debt Relief” is the amount of forgiveness the Seller is asking the lender to take to make the deal. Example: S/he owes $575,000 in loans on the subject property. She gets the lender of record to take $525,000 so her “debt relief” is $50,000. The IRS is going to compute this as a “gain”! Multiply this by 5 properties, or for example purposes, $250,000 in “debt relief” and s/he’s going to owe the IRS, assuming a 28% tax rate, $70,000!!! Now, if she ‘walks” from the deal and let’s the bank foreclose, she won’t owe ANYTHING!! What would you do?
 What we find is once folks talk to a CPA, which we recommend by the way, they come back and say, “Look, I’m going to do a short sale to your client and have to pay these capital gains on top of loosing my home?? No Way!”  I think the transaction on the above example has hit that wall! With some short sales the amount short is NOT that huge. But in some cases it is just better for the Seller’s to walk. However, this is something they should consider from all perspectives. They’ll take a big credit hit and sometimes the “stigma” is too much for some families. One should consult a real estate attorney or CPA before making ANY decision in the above example or anytime when facing foreclosure difficulties.