What are the tax consequences of a short sale?
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There are several different scenarios with regard to whether or not you will owe federal income taxes on the loss the lender takes in a short sale.
When you do a short sale, your lender is agreeing to settle the debt on the property for less than the amount they are owed. The IRS therefore allows them to write off this loss, which is why your lender will send you a 1099-C after the short sale.
The IRS considers “debt relief” to be income for tax purposes. For example: if your lender writes off $100,000 on your short sale, traditionally they will send you a 1099-C for that amount, and you would include that when you file your income taxes. The “C” stands for “Cancellation of Debt” and the law says cancelled debt is taxable as income.
There are exceptions that most individuals who do a short sale qualify for that exclude them from having to pay taxes on a short sale.
The Mortgage Tax Debt Relief Act of 2007 signed into law in January of 2008 and extended through 2012 states that homeowners who do a short sale on their primary residence, and have a purchase money loan “In other words”, they have not pulled cash out of their home with a cash-out refinance) pay no taxes on the loss that their lender incurs in a short sale. If a homeowner has pulled cash out and has put that money back into their home to “substantially improve” the home, they are also excluded from taxes on the short sale.
But if you pulled cash out on your primary residence and spent it on something other than upgrading your home like a car or vacation then this will result in a taxable event unless you qualify for the “Insolvency” exclusion.
The IRS does not require you to pay taxes on the loss the lender takes in a short sale if, at the time of the short sale, you are insolvent.
Call 888-566-8222 or www.MyOneStop.net or Text “PLAN” to 82257
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.com/vi/TG8rftEGZhc/0.jpg” align=”left”/>Michael Gray interviews attorney William Mahan, about the mechanics of short sales and foreclosures for Financial Insider Weekly. Part 2 of 2 explains what a short sale of real estate is, and how it differs from foreclosure. http://www.financialinsiderweekly.com
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