Short Sale Tax Implications
RECAP: The Mortgage Forgiveness Debt Relief Act was enacted by congress and applies to the calendar years 2007 through 2012.
When a lender forgives a debt, as in a short sale, the Lender will issue a 1099-C, generally a 1099 creates taxable income that you would be responsible. However, in the case of debt forgiven on a mortgage, the IRS has made a special exception.
The following scenarios are not taxable income:
- Primary residence- you have lived in the home as a primary residence- this means most homeowners are not liable for the debt forgiven in a short sale
- Bankruptcy- debts discharged through bankruptcy are not taxable income
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets
- Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income
- Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences
In conclusion: most short sale sellers are not responsible for the tax liability created with the debt forgiven. Most homeowners qualify as their primary residence or due to insolvency.
For more info from the IRS visit The Mortgage Forgiveness Debt Relief Act
{ 2 comments… read them below or add one }
thanks for your informative page..I have two questions: 1. My credit will be effected if I so a short sell does penalty effect only the state in which the short sell took place and not another state in which I also live?
2. Does being a senior citizen qualify me for a different process than what you explain in the short sell process?
tWhat would be the best thing to do first in starting a short sell proess?
thanks Eva Velasquez
Eva,
The short sale does affect your credit. However, any missed payments are really what hits your credit. The short sale will generally close an account on your credit report and is reported as “settled for less than the full amount”. Every missed payment dings your credit. Generally we see credit scores decrease by about 100 points.
There are unfortunately no senior citizen programs specifically. However, many programs are designed to help homeowners that cannot afford their homes, that being said, we are able to get cash for the Seller to cover moving costs. Usually between $750-$4500.