One of Leah's ongoing issues—and her biggest one—is the potential short sale of her family’s house in Rhode Island. I am so worried about how this will play out for her and the affect on her credit. Also Leah is so busy taking care of her baby and settling into South Georgia, that it is now in the background instead of the forefront of her mind.
Here is our email conversation from last week, about the potential short sale:
Me: I'd rather the short sale than foreclosure from a credit standpoint. But did you review the links I sent you last week? They implied that you could be taxed on the portion of the loan that is forgiven. Was that your understanding as well on a short sale?
Leah: Actually, I had known that and I had forgotten about it. Despite the taxation, it would still be better than a foreclosure, right? Unless I couldn't come up w/ the money to pay the taxes? Can I go on a payment plan to pay the federal government back? (LOL) I appreciate the links but I have not had a chance to look at them. I did not have Internet access at all last week, so I didn’t have a chance to start checking emails until yesterday. I will definitely look at them when I get a chance.
Me: Well, we really need to think about it because the taxation could be huge. How much total is outstanding on the mortgage + the 2nd. And if closing were to happen, how much will be applied to outstanding loan? The difference would be taxed at a 15% capital gains rate....the IRS charges very high interest rates.
Leah: Holy Crap! I owed about $243,000 total -- $193,000 to the first lien holder and the rest to the second. The sale of the property is $130,000. The second lien holder is getting $3,000.00, which is funny b/c that is what I am offering up. The first lien holder also has to pay lawyers fee's etc. So let’s estimate that they really only get about $112,000 out of the sale. What does that leave me with? $193,000 - $112,000? Then what about what I am not paying the second lien holder? Usually we get the tax credit for the house but we will not be getting it now, right? Help!!!!! What questions should I ask? I can call Military One Source for free help, but I need to know what to ask. I meant to call them last week but never got around to it. I get so bogged down with so much to do and by 8 p.m. I just want to crash! What are your thoughts?
Me: I thought a short sale would relieve the 1st and 2nd -- you need to confirm that. Then by your numbers $243K - $112K = $131K debt forgiven / at 15% capital gains tax rate, you would owe around $20K. Call Military One Source and ask:
1) Does a short sale on a house with a 1st mortgage and a 2nd relieve me of both liabilities?
2) Would I owe capital gains tax on the amount of loan forgiveness?
3) What benefits can they offer to help you reduce credit card debt?
4) Do they have any military benefits to help people upside down in their house like you are?
Whatever ends up happening with the house, I just want it to be over, so Leah and I can focus on moving forward and dealing with the other money issues at hand.