Shortsaleopedia

What effect does a short sale have on my tax return?

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What effect does a short sale have on my tax return?

asked July 23, 2011

2 Answers

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Most importantly, you should discuss your tax situation with your accountant and seek his or her accounting advice.

Having said that – you typically only pay taxes when you earn money. In a short sale transaction, it is unlikely that you earned money.

The lien holder will likely issue you a 1099-C, a tax form that is called a cancellation of debt. This is treated like income. Simultaneously, you will be completing an asset sale on your tax return. It is very likely that the asset sale form will offset your 1099-C form. Thus, the net effect of your taxes should be nothing.

Additionally, you can choose to exercise the “Mortgage Forgiveness Debt Relief Act of 2007″, which can be found on the IRS website at http://www.irs.gov/individuals/article/0,,id=179414,00.html

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THE IRS CONSIDERS DEBT FORGIVENESS AS TAXABLE INCOME. THUS, YOU WILL HAVE TAX LIABILITY FOLLOWING A SHORT SALE UNLESS YOU QUALIFY FOR A TAX EXEMPTION. 

According to current tax laws, if you owe a debt to a third party and they cancel or forgive that debt, the IRS considers the canceled debt as “taxable income.” In the case of a mortgage loan, if you don’t repay your debt, you will be taxed on the amount of the money you failed to repay the lender, commonly referred to as the loan deficiency. In other words, if default on your loan, and the lender waives their right to seek repayment, the unpaid loan proceeds are converted into taxable income because you no longer have the obligation to repay the lender.  Thus, following a short sale in which the lien holder relinquishes their right to collect the deficiency amount, they are obligated to report any forgiven debt to the IRS on a Cancellation of Debt form 1099-C. Individuals are similarly required to report the forgiven debt to the IRS on Tax Form 982 and attach the form to your tax return.

For more information on the tax consequences of a short sale please visit the Closing Table Blog.

Andrew N. Coppo

Greater Boston Short Sales, LLC

DISCLAIMER: GBSS IS NOT ENGAGED IN THE PRACTICE OF LAW AND DOES NOT PROVIDE LEGAL ADVICE. WE ARE NOT LICENSED ATTORNEYS. GBSS DOES NOT PROVIDE TAX ADVICE. OUR SERVICE IS NOT INTENDED AS A SUBSTITUTE FOR TAX OR LEGAL ADVICE. ALL RECIPIENTS ARE ENCOURAGED TO SEEK ADVICE OF AN INDEPENDENT TAX PROFESSIONAL AND/OR LEGAL COUNSEL WHEN CONSIDERING A SHORT SALE. 

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