Will the bank forgive my debt on a commercial property or vacation home?

Everything in real estate is negotiable, although some things are far more negotiable than others.  Many lenders are willing to forgive the remaining debt on short sales involving commercial properties, vacation homes, and multi-unit buildings.  The decision whether to forgive the debt or pursue the seller for a deficiency judgment is up to the lender.  If the bank believes that the seller is destitute, then it does not make good business sense for them to spend thousands of dollars trying to collect money from someone who does not have it.

The bigger issue for a short sale seller of a commercial property, second home, or investment building may be the tax consequence of the forgiven debt.

If a business owner has $200,000 of debt forgiven on a commercial building, then that owner will probably be liable for paying income tax on that $200,000.  If the phantom income, as it is called, is not offset by losses or expenses, then there will be a hefty tax due.  $200,000 of added income in a 25 percent tax bracket means that the person could owe $50,000 to the IRS.  Anyone considering a short sale should consult with their advisors about the potential tax consequences.

Make sure you read our article about the IRS insolvency exemption, titled “Do I Have to Pay Tax on my Forgiven Debt Now That the Mortgage Forgiveness Debt Relief Act has Expired?”


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