To speed a closing with the bank before the end of 2012, you need to talk with your bank to decide what is faster: a short sale or deed in lieu of foreclosure.
Q: My daughter’s home has been unoccupied for the last six months or so and is listed as a short sale. She has a buyer for the home and is waiting for Bank of America to process the short sale.
The bank has been incredibly slow to approve the short sale. If it closes after December 31, my daughter will owe tax on the difference between how much she owes and what the bank will receive from the proceeds of the short sale.
Is there anything I or she can do to speed a closing with the bank before December 31? Or should she proceed with a deed-in-lieu of foreclosure at this point? If so, what are the instructions for that? My daughter lives in Georgia.
A: Let’s start with the deed-in-lieu of foreclosure. You will still need the bank to work with you for the bank to accept the deed to the home instead of foreclosing on your home. Given that you live in Georgia, the bank has the ability to foreclose on the home quite fast – about thirty days or so. If the bank had wanted to take the home, they would have by now. If your daughter had defaulted on her loan, they could have taken the property by now.
If she is current on her loan and trying to sell it in a short sale, the bank should have an incentive to get the deal done. Unfortunately, many of the big box banks have been unable or unwilling to move quickly to work through the many files they have.
Your lender has a process by which your daughter or the person handling the short sale can communicate with the negotiator for the bank. The person in touch with the bank should have a better view to determine if the bank is close to approving the short sale or whether she is still a month or so away. If she finds out that you’re close, she can ask the negotiator to get the short sale approved for a closing by month’s end.
If the lender’s representative knows that the sale won’t occur by the end of the month, it’s unlikely that your daughter will be able to do anything to push the bank to close in that time frame Unfortunately, it’s unlikely the bank can change course and approve a deed-in-lieu in time either.
Your daughter can always try to contact the bank and see if it is able to process a deed-in-lieu and if they can commit to doing that prior to the end of December.
And, we agree that your daughter should try because the stakes are high. If either of these gets done by the end of the year, daughter’s lender may forgive the balance of the debt owed the lender after the short sale is completed. If the lender doesn’t get paid in full, the lender can write off the balance and tell the borrower to forget the repayment of what is owed.
The IRS views that forgiveness as phantom income and will tax it as ordinary income. If your daughter has $50,000 of debt forgiven, she will receive a tax statement from the bank showing the amount of indebtedness that was released. If that release comes during 2012, Congress passed a law that states that release of indebtedness on a primary residence through 2012 won’t count as income. But if Congress doesn’t extend that law, homeowners selling their homes or facing foreclosure in 2013 may face a huge IRS tax bill next year.
If the tax bill is high enough, many homeowners will face bankruptcy if they can’t pay their debts. Saddling homeowners with tens of thousands of dollars in tax debt won’t help the economy or the housing industry recover.