Unless you meet certain criteria, you may owe money on your short sale! This information was sent to me from Judicial Title and I thought it might be a useful piece of the puzzle when you’re making your financial decisions. Be sure to check with your accountant before you make any tax filings!!
With the tax deadline rapidly approaching and almost every other deal involving a short sale or modification a review of the tax implications for homeowners involved in those situations is appropriate.
* Normally, when any creditor cancels a debt the result is ordinary taxable income. So when a bank forgives a student loan or the unpaid balance on a credit card, those amounts are treated as taxable income by the IRS. Notwithstanding, congress has carved out a few special rules for homeowners in distress.
* A close look at the rules is critical. In order for a homeowner to qualify for special treatment, and avoid paying tax on the debt forgiven in a short sale the following test is essential to understand.
* The debt the lender cancelled must have been used by the homeowner “to buy, build or substantially improve your principal residence.”
* Focus on the words. Only your main residence qualifies. It can’t be a second home or an investment condo. Then look at the purpose of the loan. Only a qualifying purpose relieves the tax burden. The unpaid mortgage balance cancelled by your lender in a modification or short sale must have been used to acquire or build. Refinanced mortgage debt used to consolidate bills or pay college tuition doesn’t pass the test.
* Finally, keep in mind that debt cancellation relief is capped at $1,000,000 for individuals filing separately and $2,000,000 for married taxpayers.
* For further information see IRS Form 982 and Publication 4681.
* If you’ve had mortgage debt cancelled make sure you receive a 1099-C from the lender. –
Please don’t hesitate to call or e-mail me with questions. This is a tricky business and you need sound advice. If I don’t know the answer, I’ll get you to someone who does!
