This is a guest post by Kevin Craig who is a financial writer for Oak View Law Group. He has helped lot of debt burdened people with free counseling on debt settlement services. With his advice many are now living a debt free life.
Are you financially strapped and considering a short sale for your home? If yes, then what you thoroughly need to understand is the tax ramifications of such short sales. Every lender has their individual set of rules and preferences regarding when and how to go about a short sale.
In a short sale, the lender allows you to sell the collateral for an amount less than what you owe to the lender and the remaining balance is usually forgiven. And here is where the tax ramification emanates from. It is rationalized by the fact that when you take out a loan you are not required to report it as income because it is assumed that you will pay back the loan.
But, when the obligation to pay back the loan is eliminated, the amount becomes reportable as income. And thus the IRS would treat the forgiven amount as taxable income, quite like the forgiven amounts in normal debt settlement.
However, you need to consider your tax due, by judging the kind of loan that you took out, so you can work on your tax debt relief accordingly. Here are the tax consequences for some loans on which short sales can be undertaken:
- Recourse Loans: These are loans where you are personally responsible for the repayment of the balance after the lender repossesses your asset. Upon a short sale on recourse loan, you might get the balance forgiven but you will have to pay taxes on it and report on your income tax return
- Non-recourse Loans: In this kind of loan, you will not be personally responsible for paying the balance after the lender sells your collateralized asset. Usually, the term “non-recourse†loan is mentioned in the loan agreement and you are not required to report any forgiven amount on your income tax returns after short sale, as you are not liable for the balance repayment.
- Forgiven Debts: The IRS deems any loan balance forgiven by the lender to be taxable income, depending upon the situation. So, the amount of the loan balance you owe during the short sale is regarded as reportable income. On successful completion of the short sale, the lender will send you an IRS Form 1099-C so you can report the taxable income on your income tax return. However, any debt you get cancelled through bankruptcy will not be treated as taxable income.
- Short Sale of Primary residence: On completion of short sale of primary residence, the mortgage lender will normally forgive the loan balance that cannot be covered by the sale proceeds. The forgiven balance is taxable. At present, the intricate short sale tax ramifications are lessened primarily by the Mortgage Forgiveness Debt Relief Act of 2007 and the Emergency Economic Stabilization Act of 2008. Under the 2007 Act which any amount forgiven in a short sale between 2007 and 2010 will not be regarded as taxable income. The 2008 Act takes it a step ahead and extends the time limit till 2010. However, cancellation of any mortgage balance up to $2 million is non-taxable.  The provisions under these Acts are applicable only to redeemed amounts ensuing from defaulted loans for refinancing, purchasing, constructing or renovating the homeowner’s primary residence.
- Tax implications for other kinds of short sales
The canceled debt from vacation homes, rental properties, and second homes that are liquidated via short sale is treated as income.
Short sales are intricate issues and indeed have significant consequences with respect to tax. So, whenever you need to deal with tax issues ensuing from short sales, do consult a tax debt attorney right away, and get the best advice on how to handle your taxes.
If you have any questions, you can contact Kevin at kevin.craig672@gmail.com
