My guess is the loss in a short sale would easily exceed the balance of the $7,500.
If you lose your home to foreclosure, the debt is wiped out entirely.
As always, consult a tax professional for your specific situation. See link to attributed IRS site.
Eddie Holmes, Broker
If you read the document you will notice the following:
1 - the taxpayer is required to pay this no-interest loan over a period of 15 years.
2 - if there is a sale of the property (they call it conversion) the owner is required to pay the balance of the no-interest loan up to the amount gained on the sale. In this case, because it was a short sale, the owner probably did not gain anything with the sale. So he would not have to repay the balance. However he is still liable for the payments (see 1 above) during the period that he owed the property.
This is a very basic interpretation. I suggest he talks with his tax advisor.
Jose Dias, REALTOR
Realty One Scottsdale
I agree with what Michael said regarding the credit only being re-captured by the IRS to the amount of gain, which most likely will not exist with a Short Sale.
To your second question: No, it is not a second lien. The credit and the recapture of it are between the homebuyer and the IRS. It was not part of the closing documents when the homebuyer bought the home, and it is not part of the selling documents upon disposition.
If you need help from a good practicing CPA in Tucson, let me know and I can get you names.
Bill Parker, Loan Officer
AZ Lic# 09011570
CPA--Licensed, no longer practicing
Legacy Group Lending, Inc.
15333 N. Pima Road, Suite 300
Scottsdale, AZ 85260
(O) 480-993-3080; (M) 602-565-3646; (F) 480-993-3081
MISSION STATEMENT: To create an unbelievably enjoyable experience for my clients, while guiding them through the most important financial transactions of their personal lives. My clients know me as their Mortgage Lender for Life. I truly appreciate your referrals.
If you think it's expensive to hire a professional to do the job, wait until you hire an amateur.
Red Adair, Oil well firefighter
Long Realty - Tucson, AZ