From:  Cherry
Date:  Thu, 25 Oct 2007

In comparing foreclosures and short sales, what about selling expenses? Selling expenses for a $500,000 home could be over $30,000. Since the cancellation of debt income for a foreclosure would be the excess of the debt over the fair market value of the home, but the sale proceeds by which debt would be reduced in a short sale is the net sale proceeds, wouldn’t there be more taxable income in a short sale with a recourse mortgage?

Answer

Date:  27 Nov 2007

Hello Cherry,

The selling expenses in a foreclosure are added to the debt. See Jerry Myers Johnson v. Commissioner, TC Memo 1999-162, affirmed CA-4, 2001-1 USTC ¶ 50,391.

As highlighted in that decision, a difference can result when the sales price for the property is less than the agreed fair market value. However, the sale price in a foreclosure sale is evidence of the fair market value, Community Bank v. Commissioner, 79 T.C. 789 (1982) affirmed, 819 F.2d 940 (9th Circuit, 1987); Marcaccio v. Commissioner, T.C. Memo 1995-174.)

P.S. This foreclosure and short sale situation is horrific. Hopefully Congress will pass relief soon, but proposed relief legislation is tied up in the Senate. President Bush has said he will veto legislation passed in the House of Representatives. We might not see the conclusion until early next year.

Good luck!
Mike Gray

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