In the ever-changing lending landscape, it is hard to keep up with what the ramifications are of a short sale or foreclosure on your future purchasing options. In general, you must wait 7 years after a foreclosure, 4 years after a short sale, and 2-4 years after a bankruptcy in order to purchase a new home. However, there are more nuances to the process than that depending on what loan product you are using, which is explained in these charts.
There are also tax ramifications of both a foreclosure and short-sale, which is
why it is critical to speak with an attorney and CPA well versed in Georgia law
before considering either option.
The IRS views unpaid debt -- including mortgages -- as income. Foreclosures are treated as the sale of property for federal
tax purposes. Homeowners going through a foreclosure will need to calculate
their gain or loss for tax purposes, as well as consider any income tax that
might be due on the forgiveness or cancellation of debt. These are two separate
issues: gain on the sale of the property and imputed income from any debt
forgiveness. In official tax parlance, it's known as
"cancellation of indebtedness income." The Internal Revenue
Service has a special section on its website for people who have lost
their homes through foreclosure. The IRS also reminds homeowners that although
mortgage workouts and foreclosures can have tax consequences, special relief
provisions may reduce or eliminate the tax burdens for borrowers who lose their
homes. This information is available at: http://www.irs.gov/
Similarly,
with a short-sale, after closing a homeowner
will probably receive a 1099 in the mail from the sale of the home.
Regardless if the homeowner is fully released from the debt or not, the IRS
considers this unpaid debt as extra income to the homeowner. Georgia law
allows mortgage companies to pursue homeowners in court for a deficiency for
unpaid debt. So even if a homeowner completes a short sale, there is the
possibility of legal action in the future for the mortgage company to try for
more money, if the “demand letter” includes such verbiage. HOWEVER - if
the mortgage company sends a 1099 to the homeowner after closing, they have
given up the right to sue for a deficiency. The mortgage company either
goes for recovery of the balance through a judgment or writes off the debt and
sends a 1099.
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