There could be major tax implications for those of you considering a Short-Sale
This is so true. It has already started happening.
Please know what a "short sale" means to you long-term.
Linda Lipscomb RE/MAX Unlimited 870 W. Church St. Lexington, Tn.
http://LindaLipscomb.com 731-249-5376 731-695-1118
There could be major tax implications for those of you considering a Short-Sale. For those of you who are thinking of short-selling your home, please read the following story. There may be a huge tax liability from short-selling your home in order to avoid foreclosure.
Many distressed homeowners over the last several years have been told they should short-sell their homes in lieu of foreclosure, but were not made aware of any potential tax implications. In 2007, people though that Congress resolved homeowners of their tax liability from short-sales, but this simply is not true in all cases. The Federal Mortgage Debt Relief Act of 2007 allows for debt forgiveness of taxable income when the debt is forgiven on your principal residence up to $2 million, according to the Internal Revenue Service. This debt forgiveness is for monies used to buy, build, or substantially improve your principal residence. Homeowners who refinanced by taking all the equity out of their homes (cash-out refinance), spent that on other things, and then short-sold their home may have serious tax implications, as the Mortgage Debt Relief Act does not cover monies that were borrowed for other purposes. Bill Brunson, IRS spokesman in Phoenix says, "Depending upon what the monies were used for and what the taxpayer's circumstances are, there may not be the relief of forgiveness of debt. The debt may be considered income that they would have to include on a tax return." In addition, debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the federal tax-relief provision.
Let's say you originally purchased a home for $200,000 and then did a cash-out refinance for another $100,000 when your home value increased. If you ended up short-selling your home for $200,000, you could very well be liable to pay taxes on the $100,000 write-off, as you may have to declare it as regular income on your federal and state tax returns.
Although a short-sale is less detrimental to a homeowner's credit score than a foreclosure, unlike a short-sale, it is unlikely a distressed homeowner who had their home foreclosed on would be left with any tax liability.
Jeff Underwood, president of the central chapter of the Arizona Association of Mortgage Professionals, says "It's going to be a major issue going forward for litigation. I would not be surprised if five years from now we still have people going through lawsuits on who should have paid and who shouldn't have paid."
Short-seller beware, make sure you speak with a tax professional and/or attorney before you decide on what to do with your home. There could very well be major tax implications for those of you considering a Short-Sale.
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