laws off short sale

[Altin Velaj]

i have a client that im about to do a short sale.she has several properties and a couple off restaurants. If i do a short sale for her will the bank go after her for the remainder off the balance? 2) does she have to pay any tax after the short sale is complete? her cpa told her that she will be paying tax gain.

[Jon Holdman]

Depends on the state and the original loan. If its a non-recourse loan (like in CA), the lender can't come after the borrower for a deficiency judgment. NJ appears to allow deficiency judgments. If it appears the borrower has other assets, and the lender has the ability to go after those assets, they may well pursue a deficiency judgment. I see that pretty often here in CO on investment properties.

Forgiven debt is treated as taxable income by the IRS. Under some circumstances, the tax debt can be forgiven. If its a primary residence and the debt was for acquisition or improvements, it can be forgiven. If the borrower can be shown to be insolvent, the debt can be forgiven. But if the money was taken out of a primary and used for something else or if it was an investment property or if the borrower has assets and its not their residence, they're going to have a tax bill.

You say "paying tax gain", which might be a different issue. If someone bought a property, saw its value rise, mortgaged it to the hilt, and now does a short sale, they could in fact have a capital gain. Say they bought for $100K, it was worth $300K during the boom and they mortgaged it for $300K (bankers were silly back then). Now its worth $200K and they sell it short for that amount. They in fact have a $100K capital gain on the property. So, they have $100K in forgiven debt, which is taxable, and $100K in capital gains that's also taxable. If it is their residence, the capital gains might be exclude-able under the 2 of 5 years capital gains exclusion rule. If its an investment property, OTOH, its a taxable capital gain.