Legal Question in Real Estate Law in California

Re: Short Sale/Foreclosure

1. No 1099 or 1098 if property was your principal residence.

2. Maybe. If you "short sell" to the lender, you should negotiate a release to the effect that the sale is in full satisfaction of the debt. In any case not involving a sale to the lender, i.e., when the lender isn't a party to the workout, there is a set of written rules governing whether the lender is entitled to go after a deficiency, and a set of unwritten rules that determine whether it actually will.

3. If you mean by the county, no. The county will bill taxes to the owner. If someone else pays taxes you should have paid, that someone else may try to collect from you, however.

Re: Short Sale/Foreclosure

I hope I am not being overly simplistic with this response, but I'm not sure if you're clear on the difference between a 1098 and a 1099. A 1098 is given to you by your bank indicating mortgage interest you paid on a loan and may be deductible on your personal income tax return. A 1099 is something your lender might give you for foregiveness of debt imputed income. When a home is lost in foreclosure, in most cases these days, the lender receives less-than the amount owed, and the difference between what you owed and what they received, ends up being a "deficiency." In California, if you have one loan on your property, and it is your primary residence, and the lender elects to foreclose via non-judicial foreclosure, then they cannot legally recover that deficiency from you. That does result in "foregiveness of debt" income under both Federal and State laws. Now, both the IRS and the California FTB have rules in place through 2011 which state that in the case of a foreclosure, this foregiveness of debt income is not taxable. You may still receive a 1099, but it is not included in your taxable income.

In a short sale, in few cases will the lender accept the short-pay on the house as full satisfaction of your debt. Attorney Whipple is correct in that if they do accept the short pay as full payment, again, you have foregiveness of debt imputed income, for which you may get a 1099, but it may not be taxable under the same statute covering foreclosures. You need to go seek specific tax advice from a CPA or tax attorney to verify all of this.

That being said, if the lender does not accept the short pay as full satisfaction of what you owe them - and most short-sale acceptances I have seen reserve the right to go after the borrower for the balance, then there is no foregiveness of debt imputed income, because the bank is still looking to you to pay it back. Unpaid property taxes remain a lien on the property after foreclosure, and the new buyer will generally be responsible for repayment. I have yet to see anyone come after the homeowner who was foreclosed for unpaid property taxes.

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