[dhosek]

When my ex-wife and I were first house shopping in Chicago, we looked at a handful of short sales¹ and I am still haunted by the site of one defeated homeowner sitting on the sofa of his home as we looked around his home deciding if we wanted to buy it.²

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1. For those who don’t know, a short sale is one step up from foreclosure: The homeowner and lender agree to a sale for less than the outstanding balance on the mortgage. The buyer must not be related to the seller and the seller does receive a few thousand dollars of the sale proceeds. On the flipside, the amount of the mortgage that is not paid off is considered income and the seller must pay taxes on that.

2. We ended up not buying any of the short sale homes in the community where we were looking, but instead purchased a home that was a traditional sale.

[firesteelrain]

During the mortgage crisis, taxes were waived.

Mortgage Forgiveness Debt Relief Act of 2007 allowed for the exclusion of taxes on forgiven mortgage debt. Many people used that law in conjunction with HAFA or HAMP. Myself in particular conducted a short sale during this time and did not pay taxes on the difference.

[dhosek]

I went through a short sale in 1996 and as it turned out, the taxes that I ended up owing were identical to how much I was behind on my mortgage. One of the things that I had been told over and over back then was that I didn’t want to declare bankruptcy, but in retrospect, it turns out that declaring bankruptcy would have been exactly what I wanted to do.

I remember thinking during the mortgage crisis when folks were often underwater by $100K or more that the taxes would end up killing them on short sales. I wasn’t paying enough attention to know about the 2007 debt relief act since I was a renter at that point.

[firesteelrain]

That period of time was very rough. We bought our first home in 2006 for $134k and by 2007 it was worth about $59k. Even after adding on to it by converting our porch to another room, we ran out of room fast with the birth of our second child. I had one bedroom for one child who was about 5 or 6 and the second shared it with us. Since we couldn’t sell it with that much difference - we simply didn’t have the money to make up that difference - we ended up conducting a short sale in 2012. I rented until 2014 then used the VA Home Loan to buy my home which I have lived in for the past 10 years. It took 7 years to clear my credit report. But VA was very forgiving and the banks were OK to provide a mortgage at that time with VA backing. So it was less of a risk.