In the current real estate environment, you've probably heard about short sales. That's when you owe more on your house than it's worth, and the bank allows you to sell it for less than you owe them. It's typically a lot less damaging to your credit score than a foreclosure, but there are some quirks that one local woman is learning the hard way.
Marti Maxim bought a house in 2003, during the height of Carolina Beach's real estate boom. Living on an island wasn't all she'd hoped it would be, and then her mother got sick. Maxim decided to sell her house and move closer to her mom, but she couldn't find a buyer.
"I had the house rented, and I was losing like $900 a month on it. I couldn't go on anymore,” Maxim said. That's when she decided to do a short sale. She got an offer, and Regions Bank allowed Maxim to sell the house for $82,000 less than she owed on it. Other than the 50 point ding on her credit for the short sale, she thought her housing nightmare was finally over. Then she got a 1099 tax form in the mail from her bank, reporting she had received the $82,000 as income.
Maxim couldn’t believe it. “I took a horrific hit with this short sale financially. Now you're gonna hit me again with a 1099?"
Maxim feared she'd have to pay tens of thousand dollars in taxes on the income she never actually saw. Adding to her frustration, she says she was specifically told by the bank and her real estate agent she would not get a 1099 from the short sale. “This is a situation where nobody knows exactly what the right answer is,” she said, referring to the conflicting information she was getting about short sales.
We sat down with J. Wesley Casteen, a Wilmington attorney and Certified Public Accountant.
He says short sales are complicated. "Each individual situation is different, and the decision of whether or not a short sale is in the best interest, or whether or not it's a good move from a tax perspective is dependent upon the individuals facts or circumstances, and there's no way to give a blanket yes or no answer," he said.
Casteen said lenders are required to send out 1099 forms like the one Maxim got, but he told us that doesn't necessarily mean she has to pay taxes on that income. If you can prove you're insolvent or bankrupt, you shouldn't have to pay taxes on the debt the bank has written off.
The 2007 mortgage debt relief act also helps people like Marti, who are in a financial mess, but are not technically insolvent or bankrupt. It forgives tax liability for people on their principal residence, who took on debt to buy their home or make home improvements.
Bottom line - we found out Maxim won't have to pay taxes on that $82,000. For more information on the debt relief act, go to http://www.irs.gov/individuals/article/0,,id=179414,00.html.