Borrowers face risks in foreclosures, short sales

How to manage tax liability, avoid big exposure to lender

NORTH BAY – With the rise of foreclosures and short sales, homeowners, commercial property owners and real estate investors should be looking out for some potentially costly pitfalls.

[caption id="attachment_18147" align="alignleft" width="216" caption="Steve Ghirardo, Tom Davenport "][/caption]

Several issues can come up, most notably large unprecedented tax bills, and the possibility of being held liable to the lender if a property is sold for less than the loan value.

Steve Ghirardo, president of Ghirardo Real Estate Group and principal at Ghirardo CPA in Novato, said people call him concerned about cancellation of debt in terms of the tax liability. But he said the taxes are often a minor issue compared with potentially having to pay back lenders on properties whose value has fallen well below what is owed.

With the tax issue, if money is borrowed from a commercial lender and the lender later cancels or forgives the debt, the borrower may have to include the canceled amount as income for tax purposes, depending on the circumstances.

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