You Don’t Have to Lose Your Shirt on a Short Sale

Yeah, it's been awful. When my $300K 5-yr Adjustable Rate Mortgage came due in 2010, I was under water so much I couldn't refinance.

You didn't qualify for Obama's 

Dog House Reinvestment Act?

Please. Don't get me started.

The bank rejected the contract you had last spring, right?
What changed?

I stopped paying them.

Huh?

It's crazy, I know. When I gave them that $250K offer, I was completely current. They wouldn't even look at my Personal Financial Statement (PFS), much less talk about a short sale. The bank representative actually told me that I had to be 90 days behind in order for them to even consider a short sale.

That screw up your credit score though, right?

Small price to pay. In any event, six months later, after not making the monthly payment, socking away the extra bones, I got another buyer, this time for $175K.

And they accepted that?

Sure did. After they saw I don't even have a tree to whiz in, based on my PFS.

Won't you now get a hefty 1099 from the bank for the debt forgiveness of $125K? And pay income tax on that shortfall?

Nope. That's the milk-bone on top. This was a rental property that I put in the name of my company; I only guaranteed the debt.

I don't get it.

IRS Form 1099-C for debt cancellation only goes to the borrower – in this case Bruno'z Propertiez, LLC

But that will still flow through to you, as a single member LLC, won't it?

Nope. Tax wise for the LLC, I lose the entire asset ($300K basis), which more than offsets the income ($125K).

And that’s it?

I’ll just file a final return at year end, with no residual income to me personally.

Nice job, little man.

Of course, this information is intended for general information purposes only, and is not legal advice. Legal advice depends on the specific facts and circumstances of each individual's situation. Those seeking specific legal advice or assistance should contact a qualified attorney regarding the subject matter.