A short sale allows a home to be sold for less than the amount owed against it. It is an option for sellers who must sell in a down market, but the process entails risk and should not be commenced without consulting a tax adviser, a real estate attorney and a licensed real estate professional skilled in this still new area of real estate sales. The Heckele Law Firm, PLLC can provide experienced legal advice and counsel to clients facing the prospect of a short sale in Arizona. After fully analyzing your situation, our experienced short sale lawyers can recommend alternatives to short sales that may achieve your goals without exposing yourself to the risks associated with real estate short sales.
Many problems can arise in a short sale. In some cases, other options, including a mortgage foreclosure, may be a better solution. Some of the more common areas of concern are:
- Tax consequences: The general rule is that forgiveness of real estate debt constitutes taxable income to the extent of the debt forgiven. In 2007, President Bush signed into law a measure directing the IRS not to consider mortgage debt forgiven as taxable income. However, there are many exceptions to this law. Many sellers will still be issued a 1099 to report debt forgiven in a short sale. It is important that you determine if you will be exposed to future tax liability before pursuing a short sale of your property. Consultation with your tax adviser is highly recommended when investigating the short sale option.
- Debt forgiveness: Debt forgiveness is the most important consideration for a seller. It is not a given that the lender will forgive the unpaid balance of the mortgage—and it often does not. If debt forgiveness does not occur, the seller, who no longer owns the home but still owes the debt, is placed in a very bad position. The problem usually arises with a second deed of trust. Often the holder of a second deed of trust will accept a small payment to release its deed of trust and allow a short sale to proceed. However, release of the deed of trust is not a forgiveness of the debt itself. Unless a written release of the debt is obtained, the seller may remain responsible for the full amount of debt and can be sued to collect. The key here is in the drafting of the sales contract and a careful review of all subsequent documents including the short sale agreement with the lender(s). Key documents often appear to release a debt, but they may not. The wording is technical and critical. We strongly recommend that all contract documents be reviewed carefully by a real estate attorney.
- Anti-deficiency treatment: Arizona is fortunate to have an anti-deficiency statute. The Arizona statute has many exceptions, but if you fall within its protection, you have the option of allowing a property to be foreclosed and escape financial responsibility for any deficiency that might exist after the foreclosure. For homeowners with anti-deficiency protection, a foreclosure may be preferable to the difficult and uncertain short sale procedure. If a seller’s goal is relief from real estate debt, it should be noted that anti-deficiency protection, when available, is statutory. Short sale protection is a bargained for matter and must be well documented with the seller bearing the risk if the documentation is lacking or insufficient. Consultation with a qualified real estate attorney before taking action will educate a seller concerning available options and will provide the information needed to reach a decision that makes sense.
Our attorneys are also experienced advising clients who are in financial distress regarding bankruptcy and loan modifications.