For underwater homeowners, a short sale may be the best option available. When an individual owes more on a house than it is worth, a short sale allows that person to sell the house and give the proceeds to the lender to satisfy the debt. The remaining amount is then discharged and the two parties walk away. A short sale is usually welcomed by both sides, as the homeowner wants to get rid of the property and the lender would like to avoid the foreclosure process altogether.
A Short Sale Doesn’t Solve Everything
It is important to understand that short sales will not solve everything. As a foreclosure attorney, it is important to let people know that, while it can help you avoid foreclosure, it does not have the ability to save your credit score and cannot always let you completely walk away.
Contrary to popular belief, a short sale is really not all that much better than a foreclosure, at least for your credit score. FICO considers both foreclosures and short sales under their “not paid as agreed” classification, resulting in a lowered score. Research the particular rules regarding a short sale in your state.
Taxes May Be Owed On the Deficiency
While you may not have to pay back the difference between the short sale proceeds and what you owe, you could be required to pay taxes on the amount. The IRS has the ability to tax the deficiency as personal income and new law changes will soon implement this rule nationwide. This means if you owe $500,000 on your home and short sale it for $300,000, you could end up owing income tax on $200,000. It is best to research these specific rules before going through the process.