Short Sale Taxes

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What are Short Sale Taxes?

In a short sale situation, the lender agrees to take less than the due amount on a property. This is usually the case when the sales price of the property does not cover the outstanding debt, typically because the value of the property drops. During a short sale the debt forgiven is stated in a 1099 form by the lender and sent to the homeowner, according to the tax code. Because the IRS classifies this debt forgiven as income for the borrower, corresponding taxes called short sale taxes are imposed on that amount.
There are however exceptions to short sale taxes. The Government has passed a law that provides for the conditional exemption of short sale taxes. The Mortgage Forgiveness Debt Relief Act (2007) eliminates short sale taxes for debts of up to $2 million. In the case of married couples who file tax returns separately, this figure comes to $1 million each. It should be noted that exemptions on short sale taxes are only valid for residential owner-occupied properties.
Earlier on, only mortgage debts forgiven from 2007 to 2009 were considered for short sale taxes exemptions, but a later act, the Emergency Economic Stabilization Act (2008) provided an extended window for short sale taxes exemptions for up to 2012.

Implications of Short Sale Taxes

The implication of the short sale taxes are one of the biggest issues home owners are having to face when negotiating with their lenders. It is important that you address the issue of short sale taxes before settling your short sale. Many times homeowners are surprised with a 1099 form for the amount forgiven by the bank and many times have to pay ordinary taxes on this amount. If you are considering a short sale consult with your expert to find out everything about the implications of short sale taxes.

When Considering a Short Sale:

When considering a short sale remember to consider all short sale taxes implications before deciding on whether to do a short sale. This simple taxes that are charged to borrowers after they sell their homes only a few are even aware that the short sale taxes exists, and as a result are unprepared for it. If you are selling your home on short sale make sure to take the short sale taxes implication into account when planning.

Why Pay Short Sale Taxes?

Actually what is been collected as the short sale taxes is the amount your lender forgives on your mortgage, or the difference between your mortgage balance and the your home final selling price. The IRS classifies this as income for the homeowners and will impose a corresponding short sale taxes in the same year. Which is the 1099 form you will receive from your lender after the short sale stating the amount forgiven

Who is at Risk?

Homeowners who find themselves in a position to consider a short sale on their property may be at risk of incurring short sale taxes from the IRS. This is because the tax code provides for the lender to issue a 1099 form stating the amount of debt forgiven on the property. The IRS considers this debt to be an income and consequently imposes a tax on it. Please call your tax accountant/CPA to find out if you are at risk of incurring short sale taxes.

How Can You Protect Yourself?

If you do not qualify for the short sale taxes exemption, one other thing you may do is that you may talk to your lender into reclassifying the forgiven amount. Some lenders may agree to report it as a gift, which means IRS cannot impose short sale taxes on it. But of course not all lenders may agree to this, as this is not part of most bank standard procedures.

There are other possible ways through which homeowners can protect themselves from short sale taxes. Homeowners who do not qualify to receive exemptions on short sale taxes may file for bankruptcy or insolvency before the short sale. In any case, in matters regarding short sale taxes, it is always best to consult a tax accountant with your short sale taxes concern before taking action.

For more information about short sale taxes, resources available to you, and ways to protect yourself, see the following sites:

http://www.irs.gov/individuals/article/0,,id=179414,00.html