Waiver of Deficiency

Waiver of Deficiency - Reyes Law Group BLOG posted by Carlos J. Reyes, Attorney at Law

Waiver of Deficiency and the Mortgage Forgiveness Tax Threat

Many a lawyer or realtor will tell a would-be client that they’ll negotiate a short-sale approval that includes a waiver of deficiency. A waiver of deficiency is the difference between what the borrower owes and what the bank would sell the property for at auction. They’ll caution that the tax exemption for amounts forgiven by the banks expired in 2013 and that the law has not been renewed.  And that as a consequence, there may be a tax due the following year based on a percentage of the deficiency amount waived.  All true.  A typical example: if the deficiency amount the bank waives is $100,000, and you are in the 25% tax bracket, then the following year the IRS will be looking to tax you $25,000.  This really is a tax on “phantom income.”  The IRS considers the forgiven amount equivalent to you having received that money directly as income and turning it over to the bank.  The real problem comes when the counselor suggests a “way around it,”… bankruptcy!  Homeowners caught in this quagmire will instantly presume they can wipe out the I.R.S. tax and be done with it.  And, of course, nothing can be further from the truth because like all things IRS, … there are stringent requirements to qualify.
It is absolutely true that homeowner’s still living in an “underwater” property would be making a good financial move to short-sale and get out from with under that debt.  A properly negotiated short-sale “approval” will, in fact, include a waiver of deficiency by the bank. This eliminates the need to do a bankruptcy on the deficiency amount.  However, as to the corresponding “tax” the IRS seeks from a homeowner in this circumstance (based on the amount forgiven), discharge in bankruptcy shouldn’t be the first consideration.  Why?  In the majority of these situations, the “underwater” condition of the property and the I.R.S. Code itself serves to offer homeowners an escape in the form of an “exemption” to the mortgage forgiveness tax.  The single most important, and commonly used exemption, the “insolvency” exemption.
If you are “insolvent” at the time you deliver title to a buyer when you execute the short-sale transaction, then qualifying for an exemption to this tax is a possibility.  How to best determine whether you qualify?  As a practical solution, I recommend clients meet with their accountants. Have the accountant do a “current” personal financial statement for them.  Make sure the property you are short-selling is included in your assets and liabilities.  Using that financial “snapshot” in time as a barometer, if when you transfer title to the buyer (at closing), you are technically “insolvent” (meaning you have a negative “net worth”), then you’ll qualify for the insolvency exemption (partial or complete).  That, not bankruptcy, should be your first option when considering how to deal with and resolve the potential mortgage forgiveness tax on the forgiven amount.
Our experienced Reyes Law Group Real Estate Legal Team includes myself – Attorney Carlos J. Reyes and Real Estate Paralegals, Denise Wood and Ingrid Alonso.  Our team prides itself in delivering quality title and legal work, solid legal advice, informative communication between all parties and stellar client service.  Having professional, pragmatic, and practical experience on your side will protect your legal rights, save you money and avoid heartache.  And we can help you negotiate and close that Short-Sale!


Carlos J. Reyes  is the Principal of Reyes Law Group. He has been a member of the Florida Bar since 1988 and practices state-wide.  Carlos has been awarded a rating of “AV Preeminent” which is the highest possible rating in both legal ability and ethical standards by Martindale-Hubbell – a well-recognized legal resource. The RLG Legal Team also include attorneys Melissa J. Ulloa and the RLG Legal Support Team to bring you a dedicated, experienced and dynamic legal team to handle your legal needs.

We also assist clients in the areas of: Civil LitigationReal Estate LitigationResidential Purchase & SalesCommercial Acquisitions & SalesResidential Landlord-Tenant LitigationCommercial Landlord-Tenant LitigationShort Sales NegotiationsLoan ModificationsFamily LawCorporate Work, and Labor & Employment Law.

Call us for a FREE consultation at (954) 369-1993. Se Habla Español.

Visit our firm website ReyesLegal.com and review our credentials.

We are located at 150 S Pine Island Rd #210, Plantation, FL 33324


The Reyes Law Group BLOG is intended to provide information to firm clients, friends and potential clients about various legal related topics. Nothing in this BLOG should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this BLOG without seeking the advice of legal counsel.

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Reyes Law Group

Reyes Law Group represents clients in a multi-disciplinary legal practice involving real estate transactions and litigation with a “footprint” that covers the State of Florida. Over the firm’s first 10 years, Reyes Law Group has closed over $100M in commercial closings, representing buyers and sellers in contract negotiations, due diligence, and the related title review and policy issuance related to closings. In litigation, the firm has commercial litigation experience focused on prosecuting or defending claims such as breach of contracts, partition actions, trade secret violations, and breach of non-competes. However, our firm’s MAIN FOCUS is assisting asset and loan portfolio managers, investors and private lenders with a “ 4-PILLAR APPROACH” to the legal challenges they face with non-performing assets: 1) LOAN WORKOUTS; 2) COMMERCIAL FORECLOSURES (across the State of Florida); 3) COMMERCIAL EVICTIONS; and 4) REO COMMERCIAL CLOSINGS.30+ years’ legal experience means - WE CAN HELP!

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