Will I Be Taxed On My Short Sale?

One of the number one questions I hear is what happens after the short sale? At The Dallas Home Team we make sure that your lender cancels the debt or that you are aware if it will not be canceled so you can make an informed decision. Here is an example: You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is considered as taxable income to you. You will receive a 10-99 for the forgiven debt amount however, it may not be taxable income.

Confused? In 2007 George Bush approved “The Mortgage Forgiveness Debt Relief Act and Debt Cancellation”. What this means to you, the home seller, is that until 2012 there are certain instances where you will be able to fill out IRS Form 982 and file it within the same year that the debt was forgiven by the lender and the IRS will also forgive you the taxes you would have normally had to pay. Some of the reasons that you may not have to pay taxes on a forgiven debt include:

* Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

* Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.


* Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

* Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

* Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

(this information was taken directly from www.irs.gov )

So, in plain English if you short sale your home and it is your primary residence, the cancelled debt that you are 10-99’d for should be tax free once you file your Form 982. To read the act in its entirety visit http://www.irs.gov/pub/irs-pdf/p4681.pdf .

If you would like to comment on this blog please feel free or for more information about short sales please contact me at Tanyashomes@sbcglobal.net or at 469-452-7071.