Retirement & Financial Planning Report

Now that real estate prices have plunged in many areas, homeowners trying to sell their homes may have to accept short sales. These are deals in which the selling price is less than the outstanding mortgage balance. If you owe $200,000 on your home loan, for example, and you’re offered $175,000, that transaction would be a short sale.

You’ll generally need the mortgage lender’s permission for a short sale that will fully satisfy the outstanding loan. The lender, in turn, will look hard to see if you have other assets that could make up the shortfall. You might be asked to agree to make up the difference, either by liquidating other assets or making ongoing payments from your future earnings.

Other points to consider:

The amount you’ll be able to repay is what you’ll net after all costs. If a buyer offers you $175,000, for example, you might net only $160,000 after closing costs, transfer taxes, and sales commissions. With a mortgage balance of $200,000, you’d be asking the lender to forgive $40,000 of your loan.

 

There might be tax consequences. If you repay $160,000 as settlement of a $200,000 loan, in our example, the $40,000 difference is considered ”cancellation of debt” taxable income. Under a recently-passed law, effective through 2012, you won’t report taxable income if the loan was used to buy, build, or substantially improve your principal residence. However, you would owe tax on $40,000 of income if the sale involved a second home or a house you bought as rental property.