TAX CONSEQUENCES OF A SHORT SALE AND FORECLOSURE

October 12, 2010 at 9:30 am Leave a comment

By: Maria Hass

I recently attended a class regarding the tax consequences of short sales and foreclosures and found out there isn’t really any difference between between the two procedures in this regard.

Any homeowner whose debt is forgiven due to a loan modification, short sale or foreclosure will receive a Form 1099C from the IRS once the debt is cancelled. This document provides information on how much debt was forgiven.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale, qualifies for the relief.

Below are some questions to ask yourself to find out if your debt qualifies under the Mortgage Debt Relief Act. This information is good to know prior to short selling or foreclosing on your home.
1. Is the home a primary residence? If yes, you could qualify for the Mortgage Debt Relief Act.

2. Did you take cash out by borrowing against your home equity? If yes, what was the money used for? If money was taken out of the home and used for expenses not related to the improvement of the home, such as to buy a boat, pay off credit cards, or for the down payment for an investment home, etc., you will not qualify under the debt relief act.

3. Is the home a rental home? If yes, due to declining values, the loss on the rental home and the income (difference between what is owed and what is sold for) is “washed” as long as there was no cash-out.

If your home does not qualify for a tax exemption because you took cash out, you could either claim “insolvency” or file for bankruptcy. Insolvency means that your liabilities exceed your assets and bankruptcy is an easy proof to show that you are insolvent.

For more information on the Mortgage Debt Relief Act, go to http://www.irs.gov/individuals/article/0,,id=179414,00.html.

The information above is not intended to provide tax advice. For answers to your specific situation, you are advised to consult a tax adviser.

Entry filed under: Arizona Real Estate, Chandler Real Estate, Foreclosures & Short Sales, Phoenix Real Estate. Tags: , , , , , .

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