Are you considering a short sale? Are you wondering if you could owe taxes on the forgiven debt that the lender could report to IRS and your State as income?
We strongly recommend our clients to meet their CPA or Tax Planner to discuss the tax consequences of their Short Sale. But suffice it to say that most the forgiven debt that gets reported as income to you and you could receive a 1099 from the lender who is approving your Short Sale.
However, home owners are generally protected against a deficiency judgment after a Short Sale. The Mortgage Forgiveness Debt Relief Act of 2007 provides an exception from Federal taxation if the Short Sale of your home meets the following conditions:
1) Primary Residence: If the home subject to a Short Sale has used as a “qualified” principal residence then you might be exempt from income taxes on your Short Sale. IRS Rules defines primary residence as the home where you must have lived there for the past 24 moths.
2) Home as Collateral: Your loan for the home that is subject to short sale must be secured by the residence. This means that loan will show up on the Property Profile with the lender as the beneficiary.
3) Income Limits: Your income is capped at $1,000,000 for married couples filing separately and $2,000,000 for all others income categories.
4) Loan Term: Loan is discharged after January 1, 2007 and before January 1, 2013.
But the State income taxes for the forgiven debt might be different in the State where your home is located. In fact, the odds are that in 2015 most states will require income taxes on the Short Sales since there are far fewer people affected by the foreclosure crisis.
Bottom line is that you are well advised to Dept of Housing and Urban Development to discuss the tax implication of your Short Sale in the State where your property is located.
And Contact Us if you have any question on your Short Sale.