Written by attorney Donna Marie Nanan

How to Avoid a Deficiency After a Short Sale in Florida

A short sale may be a sensible alternative to a foreclosure sale in Florida as long as the short sale agreement with the lender specifically forgives the deficiency and specifically waives the right of the mortgage lender to pursue a deficiency judgment.

The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers who were forgiven a portion of their mortgage on their primary residence in a short sale agreement, to file Form 982 with their taxes so that the amount of debt that is discharged will not be considered “income" by the IRS.

There is no tax liability after a foreclosure sale following a final judgment of foreclosure because the borrower has been forced by law to permit the lender to make the sale and there has been no negotiation with the lender. However, the lender may still pursue a deficiency judgment as permitted by Florida statute 702.06.

Borrowers can expect a lowered credit score after either a short sale or a foreclosure, but the recovery time is usually lower after a short sale than after a foreclosure. The effect of a foreclosure on a borrower’s credit score may last up to seven years and a foreclosure creates a permanent record on a borrower’s credit history. The effect on a borrower’s credit score may continue until a deficiency judgment has been satisfied.

It would make sense to negotiate a short sale agreement that waives the right of the lender to pursue a deficiency judgment and for the borrower to then file a 982 to avoid taxation on the amount of that was forgiven. Form 82 is entitled “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 basis Adjustment). The same form is also applicable to the discharge of debt in bankruptcy.

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