The first of many I'm afraid

[Tax Prep by Deb]

I had a client come in on Friday. Although I expected this to happen to other clients of mine, this one took me by suprise.

My client purchased a home right at two years ago. The home was purchased for $595,000.00 which was what it appraised at for their loan. They were sold an interest only loan, which means that today they still owe $595,000.00. Problem is home is no longer valued at $595,000.00. If they could sell it, they may possibly get $360,000.00.

In the meantime they bought a second home (do not ask me why) I believe from what they told me because they could get a larger house than their present home, for less money. It seemed like a good investment to them especially being that they thought they could rent the other house. Problem is the person who was going to the rent the other house backed out, now leaving my clients with two large mortgages. They feel they can handle the payments for a couple of months in hopes that they find a renter for the other house.

In the event that they can not they will have to unload the home they owe $595,000.00 on. They asked me about consequences of a short sale, which I understand to be letting the bank take the house back and the bank sell the house for what they can get out of it.

My question is if this happens how does this go down tax wise for them. Let's say the bank is able to sell it for the $360,000.00. How does the difference get reported? My clients told me they would not be able to come up with the difference to satisfy the loan, so does the bank work out a payment plan for the remainder? Do they have the debt forgiven therefore will this generate a 1099C.

I've not had this come through my office, however I could see the hand writing on the wall. Now it appears that I have at least another client in the same fix.

Any thoughts? Does any body know were I could go to research how to handle this?

As always any thoughts are appreciated!

Deb!

[Tax Prep by Deb]

I just found this and I am going to try to post this link, however I'm still interested in hearing from any of you that have experienced this.

Deb

http://www.realestateinvestingtax.com/shortsale.shtml

[1040PRO]

very good article. I am sure that we we all have several new clients that will only have some one prepare there tax return because of this situation.

[TAXBILLY]

Thanx for the info Deb.

taxbilly

[Tax Prep by Deb]

I'm glad I could help. Often I have relied on your expertise (all on the community) that it really does feel good to be able to give something back!

Actually since that first client came in last week I have had another call yesterday and two others that are facing the same situation. The property values here have really taken a nose dive and there are so many houses to rent that it's very difficult to rent them for what the payment is.

I really look forward to working with all of you this tax season. I've said it before and I will say it again, it feels sooooo goooood to be home again!

Deb!

[AnnieR]

Thanks Deb, that is really helpful because I know that I am going to have more than a few of these. This section of OH has a very high foreclosure rate and I see some client names on the foreclosure sale lists every week. This is not a highly populated county (Columbiana), but every week there are at least three pages in Friday's newspapers listing sheriff sales.

AnnieR

[JohnH]

H.R. 3648 will provide some relief from discharge of indebtedness income if it passes, but I haven't seen an analysis of it yet.

[TAXBILLY]

The latest version:

http://thomas.loc.gov/cgi-bin/query/D?c110...p/~c1106lLSaI::

taxbilly