Tax Implications of a Short Sale

There are some Tax implications of a short sale. Most people the purchase of a home is one of the largest financial decisions made. Sometimes for reasons out of a homeowners control (job loss, death…) require a home to be sold as a short sale. A seller should consider tax implications of a short sale when filing a tax return after completing a short sale. Fortunately, the government provides some tax relief when you lose your home. The IRS treats any cancellation (1099-A or 1099-C) or forgiveness of debt by creditors as income. When a home is short sold the bank allows the sale of the home for less than the outstanding debt and cancels the obligation to pay the difference. If a seller isn’t liable for any debt beyond what a home is worth at the time of the short sale the seller will not owe any tax on the remaining debt. If a seller is personally responsible for the remaining debt and the bank cancels their obligation to repay, a homeowner has canceled debt that may be taxable. If the cancellation is in regards to a short sale the current tax law (good through 12/31/2013) allows a homeowner to exclude up to $ 2 million from taxable income a primary residence. In addition to the canceled debt being added to income the IRS also requires the calculation of capital gain because it treats the short sale like a traditional sale. A homeowner may be able to exclude up to $ 250,000 of gain and up to $ 500,000 if a seller is married and filing a joint return. Some requirements to determining primary residence: must have owned the home for more than 2 years, the home must have been used as a primary residence for 2 of the last 5 years. There is plenty of opportunity to avoid paying additional tax when selling a short sale. The law is called “The Mortgage Debt Forgiveness Act” The tax savings is not available for 2nd or rental homes.

Tax Implications of a short sale on 2nd homes or rental properties

If a homeowner does not qualify for “The Mortgage Debt Forgiveness Act” they may be able to use insolvency as exclusion. Insolvency – is the inability to pay debt because of lack of liquidity assets or cash. You need to hire a qualified CPA if you are thinking about short selling your home, 2nd home or rental property.

Avalon Park Accounting is qualified to assist you –