On a reverse mortgage is it better for hiers to foreclose or short sale
As the estate administrator, I need to find out if I should do a short sale or let the house go into foreclosure with the possibility of purchasing it at auction. This the situation. My father passed away in 2010 the house is currently underwater/upside down. The reverse mortgage loan is $277K however the house was appraised by lender a few weeks ago and the lender's short sale offer is $87K. If we purchase the house they will write off their loss and issue the Estate a 1099 c for 190K. As a result, we will owe IRS/State taxes on 190K of invisible income, is there any tax loopholes or any way to get around paying taxes on such a huge amount considering this is a reverse mortgage/estate/foreclosure property. What do you recommend..Option 1 short sales with 1099 tax burden or Option 2 Let it Go... to foreclosure and pick it up at auction if available. by sbaileynj918 from Maplewood, New Jersey. Oct 9th 2014
William J Acres (William_Acres)
#74 ranked lender in Arizona - 8,728 contributions
First let me say that i'm a mortgage broker, not a CPA or an attorney.. It's best you contact a local professional who will be familiar with local laws which vary state to state for specific answers directly related to your question.. But in general, with a reverse mortgage the lender cannot demand a larger amount than the value of the home at the time of disposition. In other words, if the market value of the home falls below the amount of debt owed on it (a conventional mortgage would be called "upside down" or "underwater" under these conditions), or if the occupant outlives the life of reverse mortgage, then he or she is only required pay back an amount equal to the value of the home. In short, I do not see where there would be any forgiveness of debt that would generate a tax event for you. If you call the lender and inform them that the property owner has deceased, and you would like to purchase the home based on it's current fair market value, they will typically get an appraisal done, sell you the home and then FHA will pay the loss back to the lender. Under this scenario, the estate is not issued a 1099C. If you sell the home for less than the fair market value at the time of disposition, then it's possible the estate can be responsible for taxes on the phantom income. So, in this scenario, it's best to just give the property back to the lender rather than attempting to do a short sale.. there is no benefit to you, only liability.. I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. William J. Acres, Lender411's number ONE lender in Arizona. 480-287-5714 WilliamAcres.com
Hello Mr. Acres, Your response was very helpful. As you thoughtfully suggested I have setup a consultation with a lawyer and an accountant to obtain more information about viable options/NJ laws/taxes for the estate reverse mortgage. Your insight about the possibility of the lender not issuing the estate a 1099C for phantom income on an upside down mortgage was enlightening. A lender recovering the loss via FHA was something I did not know, but now I am equipped with more knowledge, Hopefully the laws will work in my favor.Thank you again you helped to calm my nerves. If I or any of my family members lived in AZ we would do business!! Your time is appreciated have a nice evening....
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