Short Sale with Twist

[peggysioux]

Taxpayer was in process of a short sale and finds out through the process that there is a lien on property due to a judgement. Loan company offers attorney of judgement monies to remove lien so that short sale can go through. Taxpayer asks realtor if the monies paid by loan company will be considered income to taxpayer and realtor advises taxpayer to check with his CPA. He asks me but I am unsure how loan company will handle. I would think it would be considered income. The loan on property is a non-recourse loan - original loan, never refinanced. Does anyone have any experience with this type of situation?

[mastertaxguy]

Taxpayer was in process of a short sale and finds out through the process that there is a lien on property due to a judgement. Loan company offers attorney of judgement monies to remove lien so that short sale can go through. Taxpayer asks realtor if the monies paid by loan company will be considered income to taxpayer and realtor advises taxpayer to check with his CPA. He asks me but I am unsure how loan company will handle. I would think it would be considered income. The loan on property is a non-recourse loan - original loan, never refinanced. Does anyone have any experience with this type of situation?

1. Typically, a judgment lien creditor is a creditor who did not have a security interest in the property, so the fact that the loan was never refinanced is not an issue.
2. I don't see any income here to the TP resulting from the payment to the creditor, unless there is some COD issue.
3. I do see a need to have a 1099 issued to the attorney (payments to attorneys) [see TTB 23-8/form 1099 MISC].
4. Check to see if the original debt qualifies as non-business bad debt.
5. The amounts paid to the attorney/creditor are part of the sale proceeds used to determine TP's gain or loss on the sale (which of course refers to the TP's basis in the property, not the amount of mortgage debt].
6. I don't see how it matters how the loan company handles the payment.
7. The creditor debt would be an item to use if it is necessary to establish the TP was insolvent immediately prior to the sale of the property.
8. I would wonder if the loan company debt was in the TP's name alone (and/or spouse) or another person as well, or if TP guaranteed a loan for someone but that is the TP's lawyer.

[mastertaxguy]

SHORT Sale Judgment lien creditor

Taxpayer was in process of a short sale and finds out through the process that there is a lien on property due to a judgement. Loan company offers attorney of judgement monies to remove lien so that short sale can go through. Taxpayer asks realtor if the monies paid by loan company will be considered income to taxpayer and realtor advises taxpayer to check with his CPA. He asks me but I am unsure how loan company will handle. I would think it would be considered income. The loan on property is a non-recourse loan - original loan, never refinanced. Does anyone have any experience with this type of situation?

1. Typically, a judgment lien creditor is a creditor who did not have a security interest in the property, so the fact that the loan was never refinanced is not an issue.
2. I don't see any income here to the TP resulting from the payment to the creditor, unless there is some COD issue.
3. I do see a need to have a 1099 issued to the attorney (payments to attorneys) [see TTB 23-8/form 1099 MISC].
4. Check to see if the original debt qualifies as non-business bad debt.
5. The amounts paid to the attorney/creditor are part of the sale proceeds used to determine TP's gain or loss on the sale (which of course refers to the TP's basis in the property, not the amount of mortgage debt].
6. I don't see how it matters how the loan company handles the payment.
7. The creditor debt would be an item to use if it is necessary to establish the TP was insolvent immediately prior to the sale of the property.
8. I would wonder if the loan company debt was in the TP's name alone (and/or spouse) or another person as well, or if TP guaranteed a loan for someone but that is the TP's lawyer.