Tax Tips for Homeowners of Short Sale or Foreclosed Real Estate

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This is some great info that you can share with your clients, expecially those who have experienced short sales and foreclosures:

Short Sale/Foreclosure Tax Tips

Short Sale or Foreclosure Tax Tips

If your mortgage debt is partially or entirely forgiven during tax years 2007 through 2012 due to short sale or foreclosure, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness due to short sale or foreclosure.

1. Normally, debt forgiveness due to short sale or foreclosure results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

Homeowners who participated in short sale or had their real estate property foreclosed, take full advantage of the tax benefits available to you and pay no taxes on forgiven debt.

For more, check out every single rental property tax deduction.

Comments (9)

Randy Schulenburg
Schulenburg Realty, Inc. - Pingree Grove, IL
Schulenburg Realty, Inc.

Great information to pass along.  Thanks for the post.

Mar 16, 2010 12:32 PM
Evelyn Johnston
Friends & Neighbors Real Estate - Elkhart, IN
The People You Know, Like and Trust!

Yes, the old Act of 2007 was extended thru the end of 2012, which is a great thing.  I didn't know the exact IRS Form for reporting, so I thank you for that...

Mar 17, 2010 02:01 AM
Nicaragua Real Estate

Hi, I was in search of this kind information, thanks a lot friend.

Mar 17, 2010 10:37 PM
Niman Singh
SimplifyEm - Fremont, CA
Property Management Software

Hello everyone,

Glad you liked the post!

Your clients will definitely appreciate this valuable info, I haven't seen too much chatter about it elsewhere.

Thanks for stopping by

Mar 18, 2010 12:15 PM
Al Raymondi
Ocean View Realty Group in Ormond By The Sea Florida - Ormond Beach, FL
Ormond By The Sea Florida - Home and Condo Sales

Thanks for sharing this Niman.  I'm printing it to give a copy to those impacted .

Mar 22, 2010 01:36 AM
Michael Collins
*ROCK REALTY|Broker|Realtor|Real Estate|WI Short Sale Agent* - Janesville, WI
CDPE, SFR , Wisconsin Short Sale Specialist Realto

Great info!  Thanks, re-blogging.

Michael Collins - Broker
Rock Realty

May 12, 2010 09:37 AM
Timothy M. Garrity
Copper Hill Real Estate, LLC - Philadelphia, PA
Co-Founder, COO, Broker of Record

This is great information to know. Thanks for the useful tips.


May 24, 2010 06:33 AM
Rita Minion
O'Brien Realty - Solomons, MD

Hello Niman,

Thank you for this information.  Good information to pass on!  Again, thanks for your post!  Reblogging!



May 29, 2010 03:37 AM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

People who are solvent but upside down need to consider what they will do if they MUST SELL after the tax break expires at the end of 2012, but BEFORE their property is at break even again.

Jul 11, 2010 01:20 PM