Don't Panic About the Tax Part of Short-Sale

This is not a legal opinion that you can rely upon and I don’t represent you nor have I looked at anything in your case. Check with an experienced tax lawyer or accountant and you’ll find loopholes large enough to move an ocean liner.

The realtors are jumping up and down saying sell now or you will run into tax problems. Of course they always have a reason to tell you to do something now rather than later because that is the only way they make money. But in this case they are both right and wrong (in my opinion). As background let me say that I have my degree in  Auditing and Taxation when I received my MBA, I practiced tax law for two years, and I have a large network of tax specialists, domestic and international with which I regularly consult. So this opinion expressed below is not something pulled out of the whiskey bottle.

Simply stated I don’t think the money they are talking about is a net taxable result to you whether it is considered forgiveness, reduction or correction or anything else. I think the existing law is superfluous because of the claims for damages that get settled alongside of the short-sale documents. In fact, it is my opinion that after a foreclosure sale or short sale, the taxable event runs the other way — to the bank that got the free house or free money on the basis of fraudulent representations of ownership of the loan.

Secondly and perhaps more importantly, I believe that it is in the best interest of borrowers to let the waiver of tax liability expire, despite the apparent threat of having to pay for the “income” generated by the waiver or forgiveness of debt.

The reason is simple — it completely removes the argument that the homeowner is seeking a free house. Using Deny and Discover, our new name for an old strategy — if the mortgage lien is found to be defective and it therefore can’t be used in collection or enforcement through foreclosure then the note becomes unsecured and can be discharged in bankruptcy and of course is subject to set-off arising out of claims for tortious interference , identity theft, and overpayment of the loan balance.

Why do you think that no “pool” or “trust” has EVER sought to enforce anything against any homeowner and that the curtain comes down when you demand to know details of the pool, the trust, the trustee, the trustor, the beneficiaries and where the accounts are kept?

If the tax waiver is eliminated, then everyone will know that you are seeking relief, yes, but not without having to pay taxes on income generated by the removal of a liability that once existed under common law (not under the note, which was never the evidence of a the real loan).

The tide has turned and these mortgages are going to be found as imperfect liens incapable of enforcement — for those people who fight them. The notes are trash. The legal obligation to pay for the money you received runs at common law (since there is no contract, note or mortgage) to the party that loaned the money to you. The note will therefore be disregarded because it is NOT evidence of the obligation — because it contains the name of a party who was supposed to be the lender but never loaned you the money. AND the investors, who didn’t have a clue about what was really going on, have no way of determining whose money is in which loan, which is why they are all suing the investment banker — something I have been encouraging the homeowners to do since day 1 of this blog.

The worst case scenario is that the removal of the debt gives rise to ordinary income, the tax on which would be spread out over at least 4 years, but probably much more time than that.

In numbers it works like this: if your loan was for $100,000 and now that balance doesn’t exist anymore because of any reason except you paid for it, then there could be an increase in your taxable income by $100,000, which under current rules means you can add $25,000 per year to your income for 4 years as unearned income not subject to payroll tax or social security.

If you end up owing taxes, it will be on average around 15% of the original loan. But your house will be free from any mortgage. And when you pay that tax it will be around $3750 per year or a little over $300 per month. So at the end of 4 years you will have paid your taxes, $15,000, and you still have your house free and clear. If you need more time you can get it.

In many cases even the $25,000 won’t be enough to raise them into a category where income are due (poverty areas).

So my opinion, out of the box, is to let the sunset provision set in and then push the banks to admit that they never had any rights to the loans. If you follow the money trail and don’t get lost in the document trail your chances of success are good. Thus the tax provision is the ultimate forced principal reduction. It cures what ails us and pushes the bankers back into their corners.

Tags: debt forgiveness, taxation
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