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Short Sale-Taxed On Money We Didn't Receive?

By
Services for Real Estate Pros with Sevick Law PLLC

 As I originally discussed on February 13th, here, short sales, or attempts for them are becoming all the more common as homes are not able to sell for what is owed on them.  I'm beginning to see lenders now realize this and approve them easier, but still far from easily.  However, despite the ability to sell the home now and relieve yourself of the debt of the home payment you need to be aware that you may have tax liability for the money that was forgiven. 

For many people however, a little tax next year is far better than the crushing mortgage debt this year. 

Bob Bruss, a frequent columnist and radio spokesperson on real estate has this article on the 1099 that the lender should send for the debt that was forgiven so that you remember to pay the tax on it the following year. 

Comments(4)

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Catherine Myers
Windermere Bay Area Properties - Walnut Creek, CA
Walnut Creek, CA Real Estate
Yup, nothing short about a short sale in my experience here in California.  We are sometimes waiting up to 30 days just for approval.  Buyers have to decide if they sit and wait and possibly miss out on something else, or suck it up.  Many don't know the complexities involved in a short sale, and most, don't seem to know about the possible tax consequences.  It is so important for them to be educated and I always advise my clients in these situations to see both their accountant and a competent attorney.  One horror story I know of is that the folks had to claim bankruptcy the next year due to the overwhelming IRS debt. So what was worse , a foreclosure or a bankruptcy.  Being taxed on the forgiveness of debt can be a monumental figure here in California when our appreciation ran rampant over the last few years.  As an attorney.. can you tell me, does the IRS treat a foreclosure the same way? 
Mar 27, 2007 03:06 PM
David Petrovich
S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

"Being taxed on the forgiveness of debt can be a monumental figure"

Historically, to qualify for preforeclosure short sale consideration, the mortgagor must have a demonstrated financial hardship. If the hardship has caused the mortgagor(s) to be insolvent... the income resulting from forgiven debt may be totally or substantially exempt from tax.

tax implications from DIL or ShortSale 

Apr 04, 2007 12:53 AM
The TaxMan
Self Employed - Oakland, CA

I know it's been a while since you wrote this one.... here's an update on the tax law.

The House passed a bill called the Mortgage Forgiveness Debt Relief Act  , which will forgive the discharged debt on your principal home and leave it untaxed (there are some limits)

It still needs to be passed by the Senate and the President, but it looks like that may happen before the end of tax year 2007, in effect, helping everyone who had to do a short sale this year.

Dec 13, 2007 08:02 PM
Jeffrey Dolfinger
24/7 Realty Inc. - Poughkeepsie, NY
NRBA Member
IRS form 982, there is no tax on foregiveness if you are insolvment.  If your client does a short they are most likey incolvemt to some extent and the tax is either partially or fully avoided.  the tax relief act is nothing more that a political move during election times!
Dec 15, 2007 06:40 AM