What Are The Tax Consequences Of A Short Sale
Posted by Lisa Udy on Friday, October 15th, 2010 at 6:47pm.
Before committing to a short sale transaction, it is important for homeowners to understand the many different consequences of their decision. One of those consequences is taxes.
I would recommend you consult with your tax professional to get advice for your specific situation, however, here is some general information to get you started.
The Mortgage Debt Relief Act Of 2007
Generally, if you have any sort of debt forgiven, from credit cards to mortgage relief, that debt is considered taxable income.
The debt relief act of 2007 allows the tax debt to be discharged in a short sale, mortgage restructuring, or foreclosure as long as the property is your primary residence. The Mortgage Debt Relief Act allows debt to be forgiven through the 2012 calendar year. You can be forgiven up to $2 million if filing jointly, or $1 million if filing separately.
The exclusion does not apply to any other discharge due to services performed by a lender not related to a decline in your homes value. This act was implemented strictly for homeowners in distress, and is most commonly used after selling a home in a short sale transaction.
Why Is Debt Forgiveness Considered Taxable Income?
Before the debt relief act was implemented, the IRS would treat all debt forgiveness as taxable income. When you take out a mortgage, you receive money to purchase a home, and anytime you receive money, it should be taxed. However, that money isn't taxed because you are obligated to pay it back. Once the debt is forgiven, you are no longer required to pay it back and you have now turned a debt obligation into income.
You Will Still Be Taxed On Non-Principal ResidencesIf you plan to short sale any property that is not your principal residence, the debt relief act does not apply. Any debt forgiven on business property, investment property, rental property, second homes, vacation homes, and car loans will be subject to a debt forgiveness income tax.
Debt Forgiveness Tax Forms
Lenders are required to notify you of any debt forgiveness through a 1099-C (Cancellation Of Debt) tax form if your debt was over $600. If you do not receive a form, please contact the lender and ask them to send you one. When you file your federal taxes, you must complete an IRS 982 form (Reduction of Tax Attributes Due to Discharge of Indebtedness) in order to claim your short sale debt relief. Please consult with your tax professional to ensure you file properly.
A short sale is more complicated than putting a for sale sign in your yard. Talk to an experienced short sale Realtor to sell the home, find a tax professional for tax advice, and consult with an attorney for legal advice. The service provided by these professionals will save you money, ensure the short sale is done properly, and will give you piece of mind during the stressful short sale process.
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