I am in default on 12 jointly-owned properties that I am trying to liquidate as part of a divorce. All of my properties are currently worth less than the mortgage balances, due to the tough real estate market. I am aware that I will likely be taxed for the amount of the mortgage I had that is not satisfied by any particular short sale. It seems that this would not be the case if the house is foreclosed on, or becomes bank-owned.
This almost encourages homeowners to allow foreclosure, rather than to participate in helping to sell the property (when there is no equity left), because there is not “an amount forgiven” to be taxed on. I recognize that the benefit of short-sale is to lessen the effect on one’s credit report, but if a homeowner is already missing payments, how much worse will a foreclosure look?
A. Although you own an unusual number of homes, your dilemma in trying to choose between a short sale and a foreclosure is, sadly, not at all unusual these days. So I asked Craig Watts, public affairs manager of Fair Isaac Corporation in San Francisco, to comment on your case. Fair Isaac is the company that created the FICO score, used by lenders to assess borrowers’ creditworthiness.