Short Sale damages: CPA required

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Submitted by johngaltgirl on December 10, 2009 - 12:39am

Sure hope this is the right forum to post in. We went through a short sale last summer. Ick. I know. Wouldn't recommend it, but we could prove real financial hardship at the time. Many lessons learned over the last 6 years. We were underwater for the better part of 5 years. And our student loans are like another mortgage altogether. Enough excuses. We were basically the kind of home buyer that gets burned at the stake here. Still, I have followed this blog with great interest, even though I found it too late to help our situation.

This year we clearly need a good CPA. We have no idea how to handle the "loss" or loan forgiveness 1099's on these short sale agreements. It looks like the 2nd is trying to collect already (saw that coming... still scared out of my pajamas). We have stock options in the mix and although our debts outweigh our assets (still) I can see a huge tax bill coming. We do not want bankruptcy, but we do want a cpa who is familiar with both (short sales and stock options) and can help us with our taxes. Any suggestions? I'm willing to take a few hits to get a good referral, really.

Submitted by UCGal on December 10, 2009 - 7:52am.

I don't know a good CPA - but I think it's important you get one.

Bankruptcy will NOT wipe out tax debts or student loans. They're specifically excluded - as is child support obligations and judgements against you where fraud was shown.

(I'm currently in litigation and fully expect the judgement we'll win to be wiped out by bankruptcy... so I've been reading up on bankruptcy rules and what we'll need to have fraud established on our judgement.)

Submitted by DataAgent on December 10, 2009 - 8:24am.

I'd buy an hour of time with a bankruptcy attorney first. Have a complete financial profile of your current situation for him to review. He can help you plan your best course of action. At a minimum, you'll find out if BK is your best course of action.

You can find a few bankruptcy attorney ratings on Yelp: http://www.yelp.com/search?find_desc=ban...

Submitted by jpinpb on December 10, 2009 - 9:29am.

Daryl Fick. Don't know if he's taking on new clients.

Submitted by flu on December 10, 2009 - 10:03am.

UCGal wrote:
I don't know a good CPA - but I think it's important you get one.

Bankruptcy will NOT wipe out tax debts or student loans. They're specifically excluded - as is child support obligations and judgements against you where fraud was shown.

(I'm currently in litigation and fully expect the judgement we'll win to be wiped out by bankruptcy... so I've been reading up on bankruptcy rules and what we'll need to have fraud established on our judgement.)

hijack.. Mind you tell us what happened (in general terms)?

Submitted by UCGal on December 10, 2009 - 10:29am.

flu wrote:
UCGal wrote:
I don't know a good CPA - but I think it's important you get one.

Bankruptcy will NOT wipe out tax debts or student loans. They're specifically excluded - as is child support obligations and judgements against you where fraud was shown.

(I'm currently in litigation and fully expect the judgement we'll win to be wiped out by bankruptcy... so I've been reading up on bankruptcy rules and what we'll need to have fraud established on our judgement.)

hijack.. Mind you tell us what happened (in general terms)?

In 2007 we hired a general contractor to build a companion unit for my in-laws to live in. Our lot is sloped - so there was grading involved. The contractor, by his own accounting, was well ahead of work delivered, and was demanding $37k payment. When we refused to pay more money in advance of work delivered, he abandoned the job.

Since then we've collected on his bond, and on one of the subs bond (because he facilitated the abandonment - removing equipment, materials, etc.) We hired a 2nd general to finish the project. We're now in binding arbitration with the first GC who abandoned the job for the damages. It cost us quite a bit more to get any GC to consider taking on a project started and abandoned by another GC... so our project costs were signifcantly higher than the original contract. Additionally, we were hit with preliminary notices by unpaid subs - so the money we'd paid the first GC didn't go to the subs doing some of the work.

The State AG is also prosecuting the GC as a result of the CSLB complaint we filed. Let me tell you - this has been a long process... The CSLB is not consumer friendly, doesn't have the resources to investigate, let alone refer for prosecution. But we have a very strong case.

The GC we're in litigation is in financial distress. So we'll likely win a judgement but never collect. That's a big fear since we are paying arbitration fees, etc. to pursue this.

The good news is that we were able to afford (by decimating our savings) to finish the companion unit and my in-laws are now living there. My father in law is in a wheelchair and the companion unit was designed with his needs in mind... roll in shower, wider doors, ramp to get down the hill, etc. It's working out well for our family even if it did cost us almost as much as our primary house to build it.

Submitted by johngaltgirl on December 10, 2009 - 12:23pm.

Yep. Agree we need a good CPA. That's what we are looking for.
We also know the bankruptcy code and all the obligations with regard to our taxes and student loans. We don't want to go that route even for our other debt. Just doesn't sit right with us when we think we can tackle it ourselves. Thanks for the legal referral though. (I think that was another poster... I'm rolling all my replies into one) Really need specific tax advice on this one, and we don't really want to pay for an LLM if you know what I mean. There must be a good CPA out there somewhere that has dealt with these loan forgiveness and stock option issues?

Submitted by johngaltgirl on December 10, 2009 - 12:25pm.

Thank you, I'll look into this one. We'd love to find someone in North County, but we'll travel if we need to.

Submitted by johngaltgirl on December 10, 2009 - 12:26pm.

I think I was too vague in my original post. We do not want to go the bankruptcy route, even if it papers out. Attorneys I can find, it's the cpa's that seem to be hiding. :)

Submitted by Allan from Fallbrook on December 10, 2009 - 2:08pm.

johngaltgirl wrote:
I think I was too vague in my original post. We do not want to go the bankruptcy route, even if it papers out. Attorneys I can find, it's the cpa's that seem to be hiding. :)

John: I don't know where you are in North County, but check out Polito, Eppich in Vista. I've used them on several occasions for clients of mine (back when I was consulting) and they're reliable and affordable.

Submitted by SK in CV on December 10, 2009 - 2:22pm.

If the short sale was your personal residence, and the debt was purchase money debt (your post leads me to believe otherwise), you have no taxable income. The Mortgage Forgiveness Debt Relief Act of 2007 made a temporary change in the law, to generally exclude personal residence debt relief from income. It does, however, reduce your tax basis in the property, so if you had significant cash out refi's or a very low down payment, there may be some taxable capital gain. (the exclusion on personal residence capital gains not withstanding)

Additionally, forgiveness of debt is not taxable to the extent the taxpayer is insolvent. If your debts exceed your assets, after the forgiveness, you have no taxable income as a result of the forgiveness. This is without regards to whether you file for bankruptcy protection.

If it was investment property, it's a whole different story. And if it's investment property, you shouldn't be soliciting advice on a blog. You should either know the answer or getting professional advice from someone who does. That would not include a real estate broker, or a agent, or even an experienced investor. Unless they also happen to be CPA's or tax attorneys.

Submitted by ucodegen on December 10, 2009 - 2:41pm.

This year we clearly need a good CPA. We have no idea how to handle the "loss" or loan forgiveness 1099's on these short sale agreements. It looks like the 2nd is trying to collect already (saw that coming... still scared out of my pajamas).

1) Keep your pajamas on -- please
2) Loan loss forgiveness 1099s are not taxable up to 2012. http://www.irs.gov/newsroom/article/0,,i... Also see "SK in CV"'s comment above.
3) Did the second 1099 you as well? You seemed to hint that there is more than one 1099. Is there a difference between what you owed on the second and the amount on the 1099? I am wondering if the note was sold off to a debt collector and the bank listed the delta as a loss/1099. A debt collector might go away if you pay them what they paid to buy a note plus a profit. I would strongly suggest an attorney when dealing with debt collectors. They are notoriously shady characters. I would suggest an attorney with experience in bankruptcies and debt collection. Unfortunately, I can't recommend one.

I would also list each contact with them in a log: time/date and the gist of the discussion. If the debt collectors are getting abusive, this log becomes a useful tool in negotiating with them through an attorney.

Submitted by SD Realtor on December 10, 2009 - 4:53pm.

uco be careful on the loan loss forgiveness rules. There are certain stipulations to that loan loss that are borne upon the borrower.

Submitted by johngaltgirl on December 10, 2009 - 6:05pm.

Thank you all for your 2 pennies. Really. It's not exactly playdate conversation material, so I appreciate the discussion.

It was our primary residence (:(), we did a cash out refi on the second loan only to pay for the landscaping. Looking back... incredibly stupid. I could have planted the trees myself and poured a little concrete. At the time we had never heard of recourse/non-recourse and how this would change it. We had to wait 6 months on a list to get our home, wait for it to get built, etc. etc. We moved out 4 months prior to the short sale itself to secure a good rental and we did not rent it out. That would have been slimy. At least in my book. The main loan was resetting to a phenomenal variable rate so much higher than the going rate it nearly doubled our payment. We could have easily afforded a 30 year fixed on the full amount, but nobody in their right mind would refi our loan with negative equity over $250,000. Don't blame 'em. We were shopping rates right after we moved in and waited too long on that first loan. We thought we had loads of time. Ha.

We haven't actually been sent any 1099's. I'm expecting one on the first mortgage, and have no idea how to plan for the 2nd. The bank just keeps calling acting like there was no short sale event at all (BofA). So how do we plan for it tax-wise? My biggest fear is garnishment. That would throw a wrench into all of our budget/debt payoff plans for sure. That's what led me to post on this blog now... (You're right though. If I was an investor I would not be soliciting advice here. It would be my business to know this stuff beforehand. I wish I had prepared like an investor before we took the plunge 5 years ago!)

The short sale/bank communication stuff is something for an attorney, likely. We just need someone to help us figure out our tax forms for now, the rest is on us. But I love to hear what ya'll have to say about everything. Lots of wisdom to be had. After what we've been through I'm putting my kids through a "real estate school for dummies" before they graduate, so they don't repeat our mistakes.

Submitted by sdrealtor on December 10, 2009 - 6:28pm.

Just curious, did you try to negotiate a release on the 2nd? If so, what % of the outstanding balance did they ask for? Are both loans with the same lender?

Submitted by Troubled Loner on December 11, 2009 - 1:40am.

johngaltgirl,

I don't know if you saw it or not, but I sent you a private email in regards to this.

Submitted by mentalpause on December 11, 2009 - 9:13am.

I don't know of a good CPA in your area but you are right to find one -the State of California does not conform to Federal Law in several areas, and mortgage debt relief may very well be taxable income in California. With the highest marginal rate pushing 10%, and the state NEEDING revenue, it is not safe to forget the impact of state taxes when making decisions. Good Luck.

Submitted by bsrsharma on December 11, 2009 - 9:23am.

We do not want to go the bankruptcy route, even if it papers out.

johngaltgirl,

Can you please explain why? It looks like BK process was designed to help exactly people like you. (Unsustainable asset/liability position). What is your rationale? Remember, many millions go through BK every year, it is not like some leprosy.

Submitted by flinger on December 11, 2009 - 11:19am.

OP I'm having trouble understanding your handle. Who is John Galt?

Submitted by SK in CV on December 11, 2009 - 11:31am.

Who is John Galt?

Great first line for a novel.

I think someone already thought of it.

Submitted by johngaltgirl on December 11, 2009 - 11:34am.

We did try to negotiate that... back and forth numerous times. They just wouldn't budge. Their (very firm) stance was that they could move forward "to the extent of the law" after the short sale or something like that. Basically it took a recourse second mortgage and turned it into an unsecured loan. I think. The short sale did reduce the balance on that 2nd by about $20,000. The first lender paid of the the 2nd to get them to release it (but it didn't really release our obligation, clearly). And both the lenders were the same (at the time of the sale - one bank bought the other while we were in process. BofA). I don't know if BofA handles all their cases like this, but that was our experience.

As for bankruptcy. It sure is like leprosy to us. It sticks to you. It's something you carry around with you your entire life and you need to check boxes on forms declaring it every time you apply for a job or want credit in the future (just about). Especially a personal bankruptcy. We also just have a "feeling" that we should try to pay off the debts we racked up the best we can. In the case of our home, the banks had the house for collateral. And we couldn't see ourselves paying our way out of that one no matter how we budgeted. So... until we are unable to buy groceries that just won't be our choice. That doesn't mean I think any less of people that go the bankruptcy route themselves. Just a personal bias for us.

Thank you to those who sent a private message. We will start contacting people next week. We are also aware of California's unique and creative ways they want to tax their citizens and how that might be contrary to the federal laws regarding loan forgiveness. But all this is changing so rapidly, so I don't want to fill out those forms!

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