Deb's Lake Conroe Real Estate & Stuff! : Don't look back! The IRS could be on your heels.

Don't look back! The IRS could be on your heels.

So you gave up to Foreclosure? The IRS may be on your heels!IRS

If you are one of the thousands of homeowners that felt relief by allowing their homes to
become foreclosed on your relief may be short lived. Many of us became wrapped up in the
ability to use our homesteads as ATM machines and the banks were fine with it. Now, after the
money is spent and debt is rising you find that your home is not worth the amount you have
in it. Yikes! The job market has tightened and you may have even lost your livelyhood.

Or, you had a line of credit with the bank based on the equity in your home. You took a little
vacation, paid off a few bills, had a great December Holiday and "poof" your line of credit
was maxed out. Now you need to sell but can't get the amount owed on your property.

All this adds up to a potential foreclosure. Your bank may have accepted a lesser amount for
the sale of your home and may have FORGIVEN the balance of the note that was not paid. Yea!

Thank you friendly bankers. You knew we were trying and you have forgiven us.

You can opt to allow foreclosure or may be forced into it due to lack of funds. When the
house is gone you may feel better but the relief could be short lived.

Don't look back! The IRS may be following you to add to your debt...they will make you pay.

If you sold your home at a loss of 25% on a $100,000.00 debt the IRS would consider the amount
of the difference owed as income. Yes, Income.

The congress passed a bill in 2007 to
include forgiven debt without tax to mortgage loans.

That's the good news but here's the kicker.

Let's hope you used your EQUITY LOAN wisely.

This forgiveness only applys to the cash out that
went directly into the improvement of your property.

If you did go on a spending spree with vacations, cars, boats, or anything that did not
physically improve the property Uncle Sam will be at your doorstep.

You will have to pay the IRS on the borrowed money as if it were income.

If you took a home equity line of credit  let's hope you bought carpet and countertops.

Any purchase other than a home related purchase will be taxed as income.

If you lost a property other than your homestead such as an investment property or vacation
or getaway property you will be paying too. Your only loophole here is if you can prove that
you lived in the said property for a minimum of two years.

Anyway, thanks for the forgiveness to the homeowners that actually TRIED to improve their homes.
Total forgiveness is a blessing...


even that forgiveness is due to change in 2012.

When you ask, "gee, can it get any worse?"                                 Thank you Stu!

The answer is YEP!


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Comment balloon 88 commentsDeb Brooks • May 04 2010 11:38PM


Paints a good picture for the alternatives offered by a professional short sale.  Not something that people consider until it may be too late.

Posted by Charlottesville Choice Homes (Keller Williams Realty) almost 10 years ago

As much as I don't like banks I like the IRS even less but I must admit that if you use your HELOC for fun, cars and vacations that you are not paying off, well, you had your fun times, you suffer the consequences. ATMs are not free. Katerina

Posted by Katerina Gasset, Get It Done For Me Virtual Services (Get It Done For Me Virtual Services ) almost 10 years ago

Excellent article! Thank you for the information!

Posted by Jill Watts, A Luxury Experience at Every Price Point! (Realty Pro, Inc.) almost 10 years ago

The law should be revised so that the forgiven amount would be more like a non-taxable loan modification, regardless of what the money was used for. After all, the loss mitigation groups have to approve a short sale, so why not the lender when they accept less for home at the court house ?

Posted by David Saks ((retired)) almost 10 years ago

Hi Deb, A very interesting post and one that I am sure will raise a lot of concerns as it filters back into the communities. Sadly, most consumers proceed without asking the questions of qualified professionals.

Posted by William Johnson, Retired Real Estate Professional (Retired) almost 10 years ago

OOOHHHH, you said IRS..... I paid mine the 15th  i dont even want to think about that....

Posted by Randy Dodd, ePro, GRI, TAHS (Rosanna's Realty) almost 10 years ago

Deb - Excellent post, I'm reblogging it!  Thank you,

Posted by Gail Robinson, CRS, GRI, e-PRO Fairfield County, CT (William Raveis Real Estate) almost 10 years ago

You must have hit a nerve. very nice post. There is a lot of fog around taxes. We are all generally and painfully ignorant on taxes- good for the IRS, bad for the consumer.

lra real estate sells homes for you

Posted by Bryan Watkins (LRA Real Estate Group) almost 10 years ago

I must say that Uncle Sam will get his due no matter what. But how do you get blood out of a turnip...

Helping you help others live their American dream...

Posted by TeamCHI - Complete Home Inspections, Inc., Home Inspectons - Nashville, TN area - 615.661.029 (Complete Home Inspections, Inc.) almost 10 years ago

Deb, do you have any links to what you are quoting on the new law changing in 2012. I would like to read it in its entirety.


Posted by Missy Caulk, Savvy Realtor - Ann Arbor Real Estate (Missy Caulk TEAM) almost 10 years ago

Deb, not surprising.  I'm from the government and I'm here to help you.  Wait until they start running the healthcare system.  God help us all.

Posted by Craig Richardson (National Realty) almost 10 years ago

Wow, I for one had no idea that this could happen. I do remember a time when the banks were very strict about how you could use an equity line of credit, but then they got greedy? lazy? and the rules became much more relaxed, and now we have this result.

Posted by Barb Szabo, CRS, E-pro Realtor, Cleveland Ohio Homes (RE/MAX Trinity Brecksville Ohio) almost 10 years ago

I saw a lot of this in my area.  People used their homes as ATMS and had a great time for many years.  I was wondering which piper they would have to pay in the end for this.  There should be penalties - I am not opposed to this at all.  The money wasn't free, they should have known there was a price tag in the end!

My favorite this last spring break was lots of people short selling their homes and when I was called upon to do the BPO and contacted the owner - the stories were the same - they were in DISNEYLAND WITH THE KIDS OF COURSE!

:shaking head:

Posted by Renée Donohue~Home Photography, Western Michigan Real Estate Photographer (Savvy Home Pix) almost 10 years ago

Great Article - thanks for the helpful information - I will be re-blogging this!

Posted by Jennifer Marlow (ALT Property Management & Real Estate, LLC) almost 10 years ago

Good point & I'm re-posting.



Posted by Steve Moore (Steve Moore/David Massey Real Estate) almost 10 years ago

Gee, just another reason to get rid of the IRS and go with the FAIR tax ( 

Some people did some truely stupid things with their ATM er, houses, but others were trapped in the same subdivision with them, made every payment, and still find themselves way upside down because 70% of the sales in that area are REO.  Any deference from the IRS on that?  Probably (read 99.999999%) not!

Posted by Scott Bingham, (BeaufortHomeTeam / Ballenger Realty) almost 10 years ago

Actually foreclosures are also included in the 2007 Mortgage Forgiveness Debt Relief Act of 2007 which expires in 2012 if it is not renewed.  The act is only on primary residences not on investment properties.  If you had major losses including investment properties you may qualify under the insolvency clause.  Check with your CPA or tax lawyer.

Here is the  link to the Act:,,id=179414,00.html

 We need to check our sources before we make comments and get people upset.  Since I am not a tax expert I usually check with the IRS site and recommend that they talk to a tax lawyer or CPA since everyone's tax situation is different.



Posted by Evelyn Santiago, Managing Broker Heart Realty Group, Inc., Passionate About Real Estate & Our Clients! (Heart Realty Group, Inc..) almost 10 years ago

Great article Deb, but you didn't mention the worst. If the IRS hits you with a big bill and you can't pay it now, you'll be paying for many years to come. 10 years is the amount of time for a tax lien to expire. If the IRS wishes, they can extend that lien for another 10 years, and so on. But wait, it gets worse! If you think you can declare bankruptcy to get out from under big brother, think again. All government liens are exempt from bankruptcy. Student loans too. The best thing for people to do in this situation is NOT PROCRASTINATE! Look the devil in the face and take control. Call the IRS and get on a payment plan and make those payments. They will work with you, I've had several clients, as have agents in my office, had clients in similar situations with the IRS. They will work with you, and put you on a plan that you can live with, but you have to talk to them! The best thing of course is to not get into this situation to begin with, but that's another blog altogether.

Posted by John Arend, Realtor Century 21, Kalamazoo, MI almost 10 years ago

Nice way of telling a not so nice story, but now I'm wondering what bad news is coming down the pike?

Posted by Tina Gleisner, Home Tips for Women (Home Tips for Women) almost 10 years ago

Good post! It's amazing how many people will get caught in this little tax trap. I'd be curious to know what percentage of people used money from their Home Equity Loans (and foreclosed on them) on things NOT related to their property. I bet the figure is very discomforting.

I agree with John's suggestion.  In most cases, people are better to tackle problems this large head on, admitting that they're over their head.

Posted by Chris Wechner (CW Health Inc) almost 10 years ago

Great article.  I think too many people fail to consider the ramifications of defaulting on their equity loans, which are not covered by the Mortgage Debt Forgiveness Act.  Thanks for the wake up call.

Posted by Chuck Gollay (Exit Realty Paramount) almost 10 years ago


Great post, with some good information, but like I always tell my Clients "and make sure you speak with your, or a qualified Tax Accountant"

Steven Zimmerman Realtor ABR GRI / Prudential Best Realty / GULF HARBORS 34652 on Florida's Gulf of Mexico

Posted by Steven Zimmerman, Husband & Father, @Gulf_Harbors Resident Realtor (Belloise Realty Tropical ) almost 10 years ago
@ comment #1. I think that a short sale would be the same as a foreclosure as far as this forgivness of debt is concerned.
Posted by Tim Maitski, Truth, Excellence and a Good Deal (Atlanta Communities Real Estate Brokerage) almost 10 years ago

Even the government has fine print that needs to be read. So many people don't read the details of these bills, just take the headline for face value. Many are going to have a wakeup call when the tax man cometh.

Posted by Jennifer Kirby, The Luxury Agent (Kirby Fine Homes) almost 10 years ago

Great Post! I agree with John's suggestion.  In most cases, people are better to tackle problems this large head on, admitting that they're over their head.

Those waiting for the new Financial Reform Bill to possibly provide relief shouldn't hold their breath. When you consider that the bank's financial stocks (derivatives) contribute approx. 63% to the GDP the new bill will most likely be pro banks.

The old adage is still true: "Only thing certain in life is death & taxes". Bless the IRS :(

Posted by George Wilson (Lincolnton, NC) almost 10 years ago

Deb, great point you bring up. I will have to check with my CPA on all points.

Posted by Frank Rubi, (Frank Rubi Real Estate, LLC) almost 10 years ago

Deb - great post and so well written. Thank you. I was familiar with this particuar law, however, wasn't aware about the requiremnet of how HELOC should be used...Like Stu's pic....

Posted by Bo Kociuba, Realtor - Mustang, Yukon & OKC Metro 405-812-1572 (McGraw Realtors ) almost 10 years ago
Great post and great reminder...I encourage my clients who are in a short sale status to get advice from their accountant before proceeding to decide if they want to do the short sale!! We have to communicate and educate our clients!!
Posted by Deborah Byron Leffler BzyBee Real Estate Lady! (Keller Williams Realty Boise) almost 10 years ago

Deb, thank you for the information. I've sent off similar marketing recently cautioning of the allure of handing a home back over to the banks. This certainly helps fill in some details.

Posted by Sam Parkins (Buy Sell Build Virginia | Keller Williams Ch'ville) almost 10 years ago

Interesting post.  I get the feeling that most primary residence homeowners have loopholes to get out of the tax.  I think if they bought toys they should pay tax on the "income" they used for the toys, but there's just too many loopholes and grey area here I bet.  I for one wish "stregic defaults" weren't such an easy option.  It keeps the market depressed and in the end just costs those who actually pay their bills a lot more.  For the struggling homeowner who lost their job or has a real reason that's different, but those who can afford it knew what they were getting into when they bought it and it was a reasonable price when they got it, they shouldn't be rewarded with a strategic default option just because *now* on paper the house is worth less.

Posted by Nathan M, President (Rentec Direct) (Rentec Direct Property Management Software) almost 10 years ago

And don't forget about all those foreclosures that took place before the short sale took off, you remember, back in the days of the good ol' 80/20 loan.  I received a call last week from a past client who lost his home in foreclosure 4 years ago.  He is now getting "love notes" from the collection agency employed by the 20% leinholder. 

Can it get worse?  YEP!

This thing has a long way to go and it is marching on the strong & forceful legs of Uncle Sam & Big Banks!

Posted by Jenna Dixon, Empowers You With a Better Real Estate Experience (DRA Homes | Cobb County Real Estate ) almost 10 years ago
Great post. Very easy to understand. If a short sale is succes that's a great opportunity all in itself for homeowners.
Posted by Jesus Sotelo Carrillo (Capitol Real Estate Group) almost 10 years ago

Thanks for the post.  I have been talking to anyone who will listen about this very thing.  Not sure why it is that many people refuse to believe a government that is completely broke and spending money at an ever-increasing rate would start looking for new sources of revenue.  All of my owners who say they are considering a short-sale or a strategic default get this lecture.  Everything is still new enough that perhaps all the plans are not in place yet but... If you defaulted on your mortgage you should fully expect a visit from the taxing authorities.  They will want to determine how you spent your equity line, your assets at the time of default and find a way to get as much of it for themselves as possible.

As others have already said here, I have to agree that many of the people who walked away should have some level of obligation to pay taxes for their (albeit temporary) gains.  The trick is to do it in a way that could take hardship cases into consideration.  What a mess the C.R.A. and Fannie/Freddie caused.  It is easy to be sympathetic to those who have fallen upon hard times.  As for people who rolled the dice - and lost - I don't think it should be anyone else's job to pay for their failed investments.  But hey, if the government is willing to bail out institutions how is it unreasonable to expect those freebies to be passed along to the individual borrowers, too?

Posted by Dave Kinkade almost 10 years ago

great article. i did not know about the stipulation for the HELOC

Posted by Bill Buettner, Your Real Estate Connection (Keller Williams Greater Columbus) almost 10 years ago

Regardless of what 'judgments' we want to place on people who are losing their home, it's a real shame that we have allowed the Federal government to become this fierce monster that we have to continually look over our shoulders and live in fear.  All the issues with the IRS could be solved with the Fair Tax, but so many people would rather live with the devil they (think) they know than vote for REAL change, I'm afraid it will never happen. Especially now that so-called health care reform has given the IRS even more right to intrude into our lives.

Posted by Joetta Fort, Independent Broker, Homes Denver to Boulder (The DiGiorgio Group) almost 10 years ago

Deb - Wow what a great post, and great information.  Thank you so much for sharing it!  It makes sense that the IRS would look at it as income ESPECIALLY if the money was used for fun vacations and "stuff"...really makes ya think!!

Posted by Jeanna Martinez (RE/MAX Access) almost 10 years ago

I listened to a radio report last night that made me furious. The focus was on where prices are now and where they need to go to be considered in recovery. There was no discussion about lending practices - just prices. They also talked about the end of homeownership as the golden investment. Their solution was to make it easier for more people to buy homes.

If the lenders want to avoid the current home sales from being foreclosed in the future, they need to require buyers to put something into them. Giving people zero-down loans is the problem. When people had to save to buy their home, homeownership was an honor and a privilege.

I feel sorry for the people who have paid their bills because they committed to do so. Using your house to buy "stuff" and then refusing to pay your loans is something that should be shunned and paid for by those who think it is a good option.

Posted by Dana Hollish Hill, Lead Associate Broker (Hollish Hill Group, KW Capital Properties) almost 10 years ago

Good article, very informative. We as professionals are obligated to defer tax advice to accountants and legal advice to attorneys. I think too many real estate professionals try to answer tax and legal quetions for clients.

Posted by Robert Slick, NRBA, RDCPro, Trident/CCAR MLS (Beach and River Homes) almost 10 years ago

As a Realtor, my advice to my clients is that they should consult with their CPA or tax advisor before making a decision.

Posted by Jeanne Dufort, Madison and Lake Oconee GA (Coldwell Banker Lake Country) almost 10 years ago

Great Post!  So many sellers do not understand this and I hope they find this post and read it!

Posted by Terry McCarley, REALTOR, SRES, CDPE - Cape Coral, FL (REMAX Trend - Cape Coral FL) almost 10 years ago

Great post.

Posted by Mark Warner (RealEspace) almost 10 years ago

This is good information, thank you. And as far as being fair - if someone lost their money in their home and home improvements, I agree relief is a way to help them get back on their feet. If someone lost their money by spending it on toys and stuff - if there are no ramifications, they will just do it again.

Posted by Warren Schutt, Helping People with Their Moves for over 36 Years (Warren Schutt Real Estate) almost 10 years ago

Quite incomplete and unnecessarily inflamatory.  Yes forgiven debt can be a taxable event, but most people that sell short or lose the home to a trustee's sale can exclude the forgiven debt.,,id=205004,00.html,,id=179073,00.html,,id=179414,00.html,,id=174034,00.html

Consult a tax pro.

Posted by Broker Tom almost 10 years ago

People are complaining about this a lot... Let me say just three words...


People took $100,000 out of the house and spent it on cars, boat, credit cards and never paid it back... What the hell else would you call it? They should pay taxes on it.


Posted by Richard V. Foster, Esq., Broker (58356) - ABR/M, CREN, CRS, GRI, RRG, SFR (Nevada Perfect Homes) almost 10 years ago

Way too many "OPINIONS" and mis-information in these comments.  Do not give tax advice here unless you are a CPA or otherwise qualified to do so.  

I didn't see anyone mention Capital Gains Exemption ... you lose the home, but still have the exemption on gain if it was your primary residence for at least the last 2 or 3 years.  Anyone with a tax background have comments on that and how it fits this "forgiveness" act?  Seems the forgiveness wouldn't be necessary for most people anyway as most won't have that much equity or loss to use up exemption

Am I right, or wrong?

Posted by Eric Newman, Loan Officer with 25yrs in Housing, NMLS-97776 (Directors Mortgage, NMLS-3240) almost 10 years ago

 I think we need to stop pointing fingers and  bashing people who took advantage of rising home values to buy things with their home equity lines of credit. 

First of all, there always has been and there always will be people who spend money they don't have.

Secondly, there are a boat load of people out there who know how to manage their finances who if they could have predicted that home values would have dropped by fifty percent or more in such a rapid fashion would not have taken advantage of the banks highly advertized offer of taking out a line of credit to buy a boat, pay for your kids college education, remodel your home etc., etc. All those people thought their jobs were secure, and their home values would remain the same and they could pay off their debt just as they always had done.

I'm so tired of the self righteous people out there who seem to think we need to bash the people who now find themselves in a horrible financial free fall.  I know dozens who are devastated by this financial crisis. They have always paid their bills on time and managed their money responsibly.  Many thought they could refinance out of the horrible ARMS that were dished out like potato chips that most seem to forget were once illegal. The banks offered them the money and they took advantage of it.  Many used the money to reinvest in real estate. What good does it do any of us to act as if we are above any of this? Quite frankly, most of us are one step short of bankruptcy these days.  Many of us as real estate agents are struggling because our industry has taken a hit. Some of us have spouses whose jobs are on the line. All of us at some point, if we bought a house in recent years will at some point either have to give it back to the bank or sell it as a short sell because the honest to God truth is, housing prices are not going to return to the 2005 level for many years to come.  If you get a job transfer, loose your job, can't afford your house and you need to sell you can't.

It's time we started showing empathy towards our neighbors and started helping them.  It will be the fastest way to recovery. Bashing those who find themselves in a less fortunate situation financially does no one any good.

Posted by Noel Anderson HomeSmart almost 10 years ago

What ever your feelings on the fairness of the taxes, there is only one sure way to avoid paying. If a homeowner feels they will have a big tax bill then the only sure way out is Chapter 7. Not a pleasant thought but no tax bill. It needs to be done before the foreclosure and instead of a short sale.

Posted by Tom Bailey (Margaret Rudd & Associates Inc.) almost 10 years ago

I'm sure there are a lot of agents telling their clients that once the house is foreclosed or sold on a short sale, they are done with it.

Lo and behold a few years later they get hit with a large tax liability and guess who they'll be dragging into court? Yup, Agent friendly and broker.

Collectively we all need to watch what we tell our clients. I agree with comments above: "ALWAYS have them check with their tax professional..."

Good post

Posted by Bill Swanson (Berkshire Hathaway Home Services Ambassador) almost 10 years ago

Morning Deb,  The other " exemption " is if the home is your primary residence.  Your excellent post refers to it but it must be made very clear.   Well done !

Posted by Bill Gillhespy, Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos (16 Sunview Blvd) almost 10 years ago

Taxes and Death! those are the sure things in Life!

Posted by Fred Sweezer Sr., Certified Home Inspector (Hud Certified 203K Consultant) almost 10 years ago

Broker Bob,

This article is not inflamatory sir. Thank you for the links. They proved what I was explaining....


The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. 

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.



Posted by Deb Brooks (Brooks Prime Properties Wichita Falls Texas) almost 10 years ago

Great post!  Our government never misses an opportunity to get a chunk of our lives.  They're certainly NOT on your side.  More govt means more cost to everyone...even those who think they'll be getting checks!

Posted by Monica Hess, Kentucky's Feng Shui Master (Feng Shui This Kentucky) almost 10 years ago

Tax advice is always risky. For example, it was suggested above that the only way to avoid a taxable gain on investment property debt forgiveness is thru the insolvency section on IRS form 982.  This may not be the whole story.  There is also a section on the sale of "business property". SEE YOUR TAX PROFESSIONAL.

Did I mention that you must see your tax professional?

Now then, I see that the finger pointers have appeared again in some of the comments above.

At the end of the day, it just does not seem right that a house can be sold at a loss, but still incur a possible income tax liability due to debt forgiveness. Losses should be balanced against gains, and if there are excess losses there should be a way to deduct them from ordinary income. 'Tain't right to penalize us twice.

-- Just my $.02 worth. YMMV

Posted by Thomas McCombs (Century 21 HomeStar) almost 10 years ago

Great post!  I have been telling my clients to consult a tax attorney when making any and all of these decisions.  Have a wonderful Cinco de Mayo!

Posted by Shanna Hall, I love selling houses!!!St. Louis, MO 314-703-1311 (Real Estate Solutions) almost 10 years ago

All I can think of is the song Tax Man by the Beatles.  The government likes to appear to give, but then you read the fine print.

Posted by Gene Riemenschneider, Turning Houses into Homes (Home Point Real Estate) almost 10 years ago

Let's just score TWO political points at once.  AR needs to STOP featuring patently right-wing nonsense that is this inflammatory.  (It also should not have featured my patently left-wing response to some of this - which it did.)  I agree with the other poster the issues could have been addressed without the inflammatory content.

Let's stop SLAMMING those who are in financial distress.  JUST STOP.  If the public is reading AR - and we hope that they are - how on earth do you think someone in a financial mess is going to feel about calling one of you self-rightous, above-it-all snobs for help?  Hint - don't count on the phone ringing off the hook.  If I were in their shoes I'd read this thread a cross anyone one of those who seems to think they can sit in judgement OFF the list of potential brokers.

As to the tax man.  Yes, our country needs revenue to run.  Perhaps its because the wealthy here have the lowest top marginal rates of any developed country??? Hmmmm - food for thought. 

The pretzel  logic here is that it is heavily implied that people DESERVED what they got in terms of foreclosure - and then the author proceeds to  slam the Federal government for collecting on something that they considered to be ill-gotten gains to begin with. 

This is political diatribe in the guise of "advice."



Posted by Ruthmarie Hicks (Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605) almost 10 years ago

Deb, ugh!  Yet another reminder of the inevitability of death and taxes.  And great post

Posted by Patricia Kennedy, Home in the Capital (Redfin) almost 10 years ago

I have no problem with the gov. going after people who walked away from a home but were able to keep the toys which were paid by a line of credit.  Turning around values is so needed. 

Posted by Billie Atkinson (NP Dodge Real Estate) almost 10 years ago


You said...

The pretzel  logic here is that it is heavily implied that people DESERVED what they got in terms of foreclosure - and then the author proceeds to  slam the Federal government for collecting on something that they considered to be ill-gotten gains to begin with. 

This is political diatribe in the guise of "advice."




I simply wrote a post hoping to help "inform". Political diatribe? I have to giggle a little because I had no intention of slamming anyone. Just my writing style. Sorry it offended you! One of my best friends, one that I could never "slam" did just this. She took equity out of the home for a refy and then went on vacation! Now, I didn't say, "no don't do that!" simply because back then I wasn't aware of the tax impact. Luckily she is not losing her home....

but, after learning all this myself, I will darn sure tell her to hang on to the home or expect the worst.

How did you read all that into my article? Geesh, if there is anyone that is not judgemental or politically grounded....that would be me.

Have a wonderful day and by the way, the article is NOT featured. Don't blame Active Rain for MY writing.


Posted by Deb Brooks (Brooks Prime Properties Wichita Falls Texas) almost 10 years ago

You're right about it being worse in 2012. How do you think Pelosi, Reid, et al plan to pay for ObamaCare. The answer is that all this was factored in to the pricing in the guys voted for change, well, you got it!!!!

Posted by Phil Perine (Town Center Realty) almost 10 years ago

Thanks for the clarification on that ruling.  I was just talking with someone about this last week and it seemed that the 2nd's were not covered by that forgiveness clause.

Posted by Lyn Sims, Schaumburg Real Estate (RE/MAX Suburban) almost 10 years ago

Before they panic they need to consult with their accountant, usually there still isn't any tax due.  Even if they do have debt forgiveness income it is only taxable by the amount it makes them solvent.  By the time most homeowners get to this point, the debt foregiveness (if they are lucky) only makes them solvent.  The only amount taxable would be the amount by which they are solvent (in the black).  And when they figure their assets it is FMV what they can sell them for not what they bought them for-garage sale prices on clothing and furniture.

Posted by Pamela Stevens almost 10 years ago

Great post. I know we are not supposed to give tax advise, but, any Realtor who took a short sale listing and didn't advise the seller this was a possibility and to talk to their tax advisor should be in a different business.

Posted by Joe Boyle almost 10 years ago

Well, That is great, startling news.  Tax advisors have been advising that if you were insolvent when this happened, you may be in the clear.  So, Maybe leaving the tax advise to Tax Advisors is a better choice that creating more fear in the hearts of the down and out homeowner.

Have a heart.

Posted by Bill Parker almost 10 years ago

As I am a tax preparer with H&R Block (in addition to being a real estate agent), I would like to shed a little more light on this.

The principle at work here is that a deduction for one person is income for someone else. (It works that way with alimony and child care also.)  The IRS will not automatically come after you for the forgiven debt.  However, if the lender wants to claim the forgiven debt as a deduction, then they need to send the debtor a 1099A or 1099C for the amount of the debt forgiven (which form they get depends in part on whether the debt was secured.)  Once the taxpayer gets the 1099 is when they need to worry about extra taxes.

However, one of the more important exceptions, as others mentioned above, is when a person's debts exceeds their assets, they are insolvent.  In anticipation of possibly needing this, whenever someone has debt forgiven, they should consult with a financial advisor to help them determine their debts and assets immediately before and immediately after the debt is forgiven so that this exception may be used if needed.

I hope you find this useful.

Posted by John Wheeler (Northwood Realty Services) almost 10 years ago

Ouch...  a lot of that will unfortunately hurt unsuspecting home sellers.  It's unfortunate that this whole short sale dilemma hasn't had someone step in and structure it.  From the process itself to the consequences...  Good post Deb.

Posted by Lee & Pamela St. Peter, Making Connections to Success in Real Estate (Berkshire Hathaway HomeServices YSU Realty: (919) 645-2522) almost 10 years ago

So there are going to be millions of prospective homowners who are excluded from the housing market for a number of years because of tax liens and destroyed credit...The longer this goes on, the more self-destructive it becomes.

Posted by Al Kernek (Pacifica Endeavors LLC) almost 10 years ago

The information that you are posting is very much untrue.  You did not specify whether or not this applied to primary residences or investment properties and you didn't comment on certain states, like California, that will relieve you of the tax associated with the loss in addition to the federal law that is good through 2012 that considers the loss untaxable on a primary.

You also failed to mention that there are ways to avoid this tax, like proving insolvency or filing a bankruptcy.

You are scaring people out of making logical and business like decisions by playing on their emotions. For lots of people, short selling and/or going to foreclosure is the absolute smartest thing they can do.  Acting on emotions stemming from articles like these when a business decision needs to be made is not wise. 

People attention to what makes sense and ignore emotional, scary posts like these.  If you are insolvent, which most of us are, then you are out of the woods.  Insolvency basically means that you owe more than what you are worth, and negative equity counts towards this. If it's your primary, you're fine.  If your foreclosing on a rental, you can even count the negative equity in your primary in your insolvency equation. And if you file bankruptcy, your not taxed on anything at all.

Yes, you should always consult with a tax attorney before taking opinion as fact.

No decisions should be made in fear.

Good luck out there.



Posted by Kurtis Kooiman almost 10 years ago

Ah, Deb, you're just full of good news!  With a $250,000 deficiency on a primary home, you're telling me my customer still has to worry that, regardless of how much time passes, he's still gonna get screwed?  And regardless of how much tax loss on the property he had at the time of SS that covered the deficiency, he's still gonna get screwed?  Me thinks one would be well advised to talk with a CPA who specializes in short sales -- and yes, they're out there. 

I think there's far too much frightening speculation out there and before one's customer gets scared out of their wits, run your commentary by an IRS specialist, a tax lawyer, a CPA, let them edit it, and then put it on the blog.  We all need accurate information. 

Thank you.


Posted by Sally Rackey almost 10 years ago

Deb, great post!!  You just got to love our government.  I have no problem with the government to go after those who walk away from their home but to be allowed to keep the fancy items that were on credit cards. COME ON!!!

Posted by Lizette Fitzpatrick, Lizette Realty, Lexington KY MLS - Kentucky Homes (Lizette Realty - Richmond KY) almost 10 years ago

Good Lord Debra...

It's hot in here. I haven't decided if it's from the flames or if it's just because it's so crowded :)


Posted by "The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW. (President-Tutas Towne Realty, Inc.) almost 10 years ago

Great post, thank you.  very informative.

Posted by Brian Leavitt (The Eastside Real Estate Team) almost 10 years ago


Thanks for the information.  All of these things I have heard and read.  I have even heard of tax lawyers advising that a seller counter the bank(s) stipulating that they do not produce a 1099 in a short sale agreement, so that they can avoid paying taxes on the forgiven debt.

Posted by Eugene Adan, Carlsbad Real Estate (Adan Properties, Carlsbad, CA (760) 720-9710) almost 10 years ago


All I can say is that if this article "scared" anyone they should simply re-read it! I'm not here to teach anyone or scare them or claim that I'm a tax accountant. I certainly did not point fingers, mis-quote (all in my own words), or bash the IRS or anything else.

To think, one of my little posts could possibly get you so mad. Sounds like it must be a very sore subject. Since I don't deal with short sales or foreclosures I guess I didn't realize what an open wound it must be to you.

And, even if it's your primary home for you to say that it's fine? Talk about untrue. I did differenciate between homestead and investment by the way.

Proving that you are insolvent sounds a bit painful and going bankrupt is a nightmare.

And, you consider this a way to avoid the tax?


Posted by Deb Brooks (Brooks Prime Properties Wichita Falls Texas) almost 10 years ago

the IRS is aloways gonna get us for what they can.

Posted by Jirius Isaac, Real Estate & loans in Kenmore, WA (Isaac Real Estate &TriStar Mortgage) almost 10 years ago
Wow. That's a great post to thnk about.
Posted by Chris Hein, San Diego Real Estate (Keller Williams Realty) almost 10 years ago

I'm with Eric Newman. 

Why are you putting your career and license at risk with an article like this?

You are not a CPA by designation on this site and there is no copy-write or credit to the original author in your post.  Everyone!!  You need to understand your duties.  Hate to be negative nelly, but I see way to many of you commenting on commissions, legal issues and taxes.  STOP!

I have a written addendum all clients sign on my short sales stating I have advised my client to seek advise from a Bankruptcy Attorney and a CPA specializing in real estate and releasing me from any issues that could come up.  I suggest everyone start to do the same if you are not already.


Good News!  Got my third referral this year from a fellow Active Rainer!

Keep your Minnesota referrals coming!  I love helping fellow agents look good!

Posted by Eric Helmers, Your Trusted Real Estate Source almost 10 years ago

Thanks for posting and thanks to John Wheeler (#68) who seems to understand it better than most.  I just tried to have this conversation the other day with a member of our team and it was clear that he didn't know the answer.  However his advise is the one that I will follow:  Have them consult a tax attorney or CPA for this. 

P.S. An Enrolled Agent may be a less expensive way for people to get good solid tax advice with representation.  Not all attorneys and CPA's truly know the tax code, it's just not their specialty.

Posted by Gary Pike (Better Homes and Gardens Real Estate Metro Brokers) almost 10 years ago

Quite the topic, rarely do I read all of the comments, but I had to on this one.  I like the idea of

the addendum advising sellers to seek legal and financial advice.

Posted by Steven Pahl, Real Estate Consultant Tampa, FL 813-319-6423 (Keller Williams Tampa Properties) almost 10 years ago

As Bart Simpson would say "Aye Corumba" :)

Never in my life would I have expected to see someone having to defend themselves for trying to relate the "POSSIBLE" tax implications, written by incompetent legislators, stemming from the housing crisis.

Not only has our tax laws become impossible to navigate but now we have legislation on the books which compounds the very problems that CONGRESS CREATED IN THE FIRST PLACE!

While Congress and this administration is spending the public monies like a drunken sailor - and seeing how I am a retired sailor I think I can use that phrase safely - how about if stop the bickering, take a deep breath and recognize that we, collectively have a very serious problem that we must overcome. Lets grow some thick skins people, recognize the problem and do everything we possibly can to prevent Congress from unleashing such damaging legislation in the future, for they are clearly disconnected from what is happening on main street.

With that said, the company I work for has handled 100's of short sales and the very first thing we tell our clients is that there are possible tax implications and that they should consult with a tax accountant and a attorney. Then we have them sign a three sentence form acknowledging the conversation and then we begin to assemble their short sale package.

As Realtors, I think it is best to keep the process as simple as possible, lest we find ourselves on the "who's who" list of board infractions.

Let's face the facts. If your feelings get hurt because people are trying to understand the problem...perhaps you should try reading poetry and skip the discussion!

Posted by Don Hawley, CDPE (REIT Homes) almost 10 years ago

Thank you so much for such timely information -this was a great blog! 

Posted by Cliff Kavanaugh, - 434-466-5128 - (Keller Williams Realty of Charlottesville Virginia) almost 10 years ago

And I see nothing wrong with it! Homes were never meant to be our atm's!

Posted by Greg Nino, Houston, Texas (RE/MAX Compass, formerly RE/MAX WHP) almost 10 years ago


Great article, but I would like to clarify one thing.  The banks forgave the mortgages not the notes.  The banks regardless of the "forgiveness law" have up to 5 years to come after borrowers for the notes and may file on 3 separate occasions.  This is  not well known, however they are starting to sell these notes "paper" off to investors who will come after the money and the banks can wipe their hands clean of the mess and not have fingers pointed at them. 

Sitting at a meeting with a few Bankers this was a direct question of a fellow broker in our firm to a bank VP and he said yes, this is happening and there is nothing out there to stop it.  I believe this bit of information needs to be spread.  I smell lawyers hot on the trails of real estate agents with people crying victim that there agent said they would be forgiven of their debt.  Additional disclosures need to be in place and I have yet to see them warning folks that the forgiveness is of the mortgage and not the note.  Be careful out there folks, it is the wild wild west and Realtors will be a target in this mess!

Posted by Stephanie Anson almost 10 years ago

So many comments, sorry i did not read the thread, so someone might have noted this already. The Mortgage Forgiveness Act would also help if at the time of short sale the Seller was insolvent. And this is important to discuss with the tax man

Posted by Jon Zolsky, Daytona Beach, FL, Buy Daytona condos for heavenly good prices (Daytona Condo Realty, 386-405-4408) almost 10 years ago

The practice used by the landowners in The Dark Ages, that of squeszing blood out of turnips is not new to the IRS.

The only way a person can come anywhere near solvency is to declare insolvency in bankruptcy court and get it all over with.

Only then can they start over and sleep at night.

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley,, MD & VA Homes and Real Estate) almost 10 years ago

Thanks John Wheeler #68

I've gone over this so many times with tax man and always tell my clients to check with CPA and ortheir Tax advisor. I've been told exactly what you've said and every client is different circumstance, never give them this kind of advise.

Posted by Marcia Pawlowski, Broker (Vogler Feigen Real Estate) almost 10 years ago

Great post Deb! This is a fact that many people do not know about. While each State may have different laws on the books that address this matter. (like California does) we as Realtor's and Agents must make sure that our clients know their may be penalties and therfore they must speak with their accountant to confirm whatever penalties they may incure by selling the home as a short sale.

Best wishes,


Posted by Matthew Bartlett (Hill Top Real Estate/BRE Lic. #01353034) almost 10 years ago

Deb...Thank you for the blog...I think it is great information that you have made many people aware of. 

The nice thing about living in the USA is you can share your thoughts or info with others...the bad thing is that those who disagree with you can do counterpoints to you and do it in a spiteful, loud, and hurtful manner such as some of these responses.

That being said...I am glad you have not deleted those who disagree or pontificate their position.

I sure think...and I believe the majority of responders to this blog would agree...that you do not need to defend yourself to the negative responses.  Some of those are knee jerk quality and some are sharing their opinion which is different from you or the majority.

For many years I have advised, in writing, that all clients and customers...buyers, sellers, tenants, etc... talk with a licensed and qualified tax expert regarding any tax ramifications on any type of real estate transaction. 

Great blog!! Thanks again.

Posted by Mike McCann - Nebraska Farm Land Broker, Farm Land For Sale 308-627-3700 or 800-241-3940 (Mike McCann - Broker, Mach1 Realty Farmland Broker-Auctioneer Serving Rural Nebraska) over 9 years ago