When doing a short sale the debtor may receive a form 1099-C for the amount of the lender's losses. This is considered loan forgiveness in the eyes of the IRS and the lender may issue a form 1099-C.

If the debtor has other assets such as savings and is not insolvent, the debtor may end up being responsible to pay ordinary taxes on the amount of the 1099-C.

If the debtor settles a debt with a creditor for less than the full amount owed, the debtor may be required to report the forgiven debt as regular income, with certain exceptions. The forgiven debts include money owed after foreclosure or property repossession or credit accounts are not paid. Exceptions noted below.

If a lender forgives or writes off $600 or more of a debt's principal (the amount not including interest or fees) the lender must send the debtor and IRS a Form 1099-C at the end of the year. When the debtor files tax returns for the tax year in which the debt was written off, the IRS requires that the amount is reported as income.

Warning: The debtor may not receive this form from the creditor even though the creditor submitted the form to the IRS. If the creditor does list the income on their tax return and the IRS has the information of the transaction on file, the debtor could get a tax bill or, worse, an audit notice.

There are several exceptions stated in the Internal Revenue Code. For example, you do not have to report the income on your tax return if the write off of the debt is intended as a gift, you discharge the debt in bankruptcy, or you were insolvent before the creditor agreed to settle or write off the debt. Always encourage the debtor to consult qualified tax and legal counsel to see if these circumstances apply.

It is important to realize the tax implication is only on the amount of the forgiven debt.

Example: The lender is owed $150,000 and agrees to accept a $100,000 short sale. The amount of forgiven debt is $50,000 and the most the lender could report on a 1099. Assuming the debtor was in a 15% tax bracket the tax consequences would be $7,500.

By comparison if the property was sold at public auction and brings $100,000 the lender could seek a deficiency judgment against the mortgagor to recover the $50,000 shortage, plus foreclosure expenses. The short sale is the much better alternative.

Foreclosures are at an all-time high in America. Experts predict nearly 1.4 million homeowners will face foreclosure in 2008 and residents of Florida, California and Texas will take the hardest hit.

In 2007, Arizona foreclosures rose nearly 40-percent and Colorado reported one of every 345 households either filed foreclosure or were on the brink of filing. Currently, the only states immune from escalating foreclosure rates are Vermont, Maine and the District of Columbia. However, experts predict these states will experience an explosion of filings when adjustable-rate mortgages begin escalating later this year.

How did the housing crisis in America occur and why was it allowed to happen? Americans have always strived to reach the American Dream of homeownership. When zero-down, interest-optional balloon payment loans were offered, people were attracted to them like flies to honey. Millions of unsuspecting people were suckered into sub-prime loans and invested in houses way beyond their means.

As adjustable rates increased, mortgage payments doubled or even tripled. Individuals struggling to make their ,000 note payment were now looking at ,000 to ,000 monthly payments. The sad reality is they simply did not possess the financial means to pay their note. When the bubble burst, their dream quickly became a nightmare.

Foreclosures not only have a devastating effect on the homeowner, but the lending institutions and local community as well. Individuals who reside in communities with high foreclosure rates are forced to pay higher property taxes, local taxes and increased fees for utilities.

Additionally, the potential for crime increases. Vacant homes are a magnet for unscrupulous characters. Vandals destroy property, oftentimes breaking windows and doors or leaving graffiti on both interior and exterior walls. Criminals engage in illegal activities including the sale of illegal drugs or weapons.

Real estate experts claim each individual foreclosure costs lending institutions approximately ,000, while preventing foreclosure costs less than 00. If this is true, why are foreclosures skyrocketing?

The primary factor stems from the fact that many people facing foreclosure become paralyzed with fear. They avoid contacting their lender and instead wait for the sheriff to arrive with their eviction notice.

There are steps homeowners can take to stop the foreclosure process. First and foremost, individuals in financial distress should contact their lender. Foreclosures are usually handled by the lender’s Loss Mitigation Department. Additionally, the U.S. Department of Housing and Urban Development (HUD) offers free credit counseling through approved agencies and can assist homeowners negotiate with their lender.

Analysts claim America’s housing crisis will eventually make a turn for the better. However, they predict it will take three to five years to recover from the onslaught of foreclosures.

On the bright side, there has never been a better time for real estate investors. With an abundance of distressed properties being offered for pennies on the dollar, now is the time to buy. However, not every foreclosure property is a great deal and due diligence must be conducted before riding the foreclosure wave.

One of the best ways to invest in foreclosures is to seek out private real estate investors who purchase bank portfolios of real estate owned property. Investors are able to purchase properties in bulk and pass their savings along to interested parties. It’s not uncommon to purchase bank foreclosures from private investors with instant equity of 20-percent or more.

Although the real estate market currently looks bleak, there is hope on the horizon. If you are currently facing foreclosure take the first step and contact your lender immediately. If they are unable or unwilling to work with you, contact HUD. While the foreclosure process can be overwhelming, it can be overcome with persistence and patience.

true/slant.com
author Megan Cottrell

As the $8,000 home buyer tax credit dried up, so did housing sales. The number of people buying a new house dipped to the lowest levels in recorded history after tax credit ended in May, causing many people to worry that the recession will be shaped like a W – a perilous double dip.

What’s the cure for the ailing housing market? One real estate analyst says the answer is counter-intuitive: more foreclosures.

Why? Well, analyst Mark Hanson says foreclosures are what people want to buy. The new home buyers out there want (and perhaps can only afford) a good deal. But lately, pressures on banks to halt foreclosures have curbed the supply of cheap houses. Because we’re in a market where people are iffy about taking a big risk, unless the carrot is big and juicy enough, people aren’t going to bite.

Plus, Hanson says, there’s still a huge shadow market out there – homes where the mortgage isn’t in good standing, but they’re not in foreclosure yet. Hanson says we’ve got to clear through all this bad inventory – both the homes in foreclosure now and the ones yet to be – if we want the market to turn around.

The way he explains it sounds sort of like an old rusty faucet – you’ve got to let the water run orange for awhile before it starts to come out clear.

At our current pace of foreclosure, he says, it will take 101 months to clear through the system – 8 years. But if we doubled our rate of foreclosure to 180,000 a month, he says it till take 42 months, or about 3 and a half years.

Housing activists all over the nation are putting pressure on banks to slow the rate of foreclosure. It’s hard to argue with. Who wants to put more people out of their homes?

But then again, Hanson could be right. If the entire economy is spooked by low housing sales, it means less jobs being created, fewer people spending money. Many of those who are dreading a foreclosure can’t pay their mortgage because they can’t find a job or find one that will pay a decent wage.

Is it better to be without a house in the short term paired with a quicker recovery? Or if Hanson’s right, are we just dragging out the inevitable?