Let’s assume Linus takes out a $50,000 mortgage to buy a house. After moving in, Linus realizes that he no longer afford the mortgage. Linus’s friend, Lola, would like to buy the house but she can only afford to pay $45,000.

The bank, not wishing to acquire another property via foreclosure, may agree to allow Linus to “sell short”. This means that Lola could pay the bank $45,000 purchase the home.

In this case, the bank would suffer a $5,000 loss. In most cases, Linus would have an income tax consequence of $5,000 for the bank’s forgiveness of debt.

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Foreclosure, short sale

This entry was posted on Wednesday, June 17th, 2009 at 7:28 pm and is filed under Foreclosure, loan modifications. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.