Short Sale 411

Short Sale means negotiating with the bank to accept less than is what is owed as payment in full. This mostly work on properties that are upside-down in value.
It would work like this: the loan amount is $200,000, current market value $180,000, an offer comes in at $175,000, closing cost $8,000. Net to the bank $167,000. This leaves a deficiency of $33,000.
Lender may take several approaches to this:
1. Not to forgive the debt and issue a deficiency judgment.
2. Request a promissory note for the difference. Lenders would normally have the homeowner sign a promissory note for a portion of the debt and spread it out between 1 – 10 years at a 0 to 2% interest rate.
3. Finally they can forgive the debt and write off the loss. The IRS will issue a 1099.
A 1099 means that the homeowner would need to pay taxes on the deficiency, which based on their tax bracket, can vary from 15% to 33% or more. However if the homeowner can prove insolvency, the 1099 becomes null. With the new bill passed The Mortgage Forgiveness Debt Relief Act of 2007 mean the forgive debt is really forgiven by the IRS