As an agent that handles a lot of short sales I come across many questions regarding the possible tax implications.  The Mortgage Forgiveness Debt Relief Act of 2007 which covers all homes sold or modified in 2007, 2008, and 2009 has cancelled out many homeowners obligation to pay income taxes on the so called "gifted" income (the difference between what you owe and what it sells for).

 Unfortunately, this new law does not cover all homeowners.

The next challenge is to figure out how much of the "gifted" money is taxable.

In the eyes of the IRS if you bought the home in 2005 and paid $300,000 and are currently unable to pay for your mortgage and due to the market value declining the home is now only worth $250,000 you would in the past been taxed on the $50,000 of "gifted" income.  With the Mortgage Forgiveness Debt Relief Act of 2007 that income is no longer taxable IF this home is your primary residence.

What about a situation in which you bought the same home in 2000 for $200,000 and subsequently refinanced it to $300,000 and now are in a situation where you can no longer afford the payments and the home has declined in value to $250,000? 

This is where it gets sticky! Because... the IRS views this as self induced debt and they will treat that amount as taxable. 

Well than why would you want to do a short sale instead of just letting the bank take it by foreclosure???

Actually this is rather simple, the IRS treats the short sale the same way it treats the foreclosure.  In the eyes of the IRS they are both sales. PERIOD.



So, when the bank forecloses and finally places it back on the market several  months later all the while property values are still dropping the home that WAS worth $250,000 now is only worth $225,000 and that's hoping that it wasn't ransacked while it sat vacant.

Now what do you have? A MUCH bigger loss to be paying taxes on.  

Now I am not a CPA or a tax professional and this is only a very simplistic version and I always recommend people to speak to "their people".                   

If you or someone you know is upside down on their home value and needs to sell please have them contact me at bobbiefiles@kw.com. 

Visit my website at www.BerkleyMass.com for more information on short sales and information on Bristol / Plymouth County Real Estate.