February 4th, 2012 9:11 AM by Frank Ferrell
If a bank writes off debt in a short sale, it’s a “taxable event,” and the lender tells the Internal Revenue Service about the deal by submitting a “Form 1099-C, Cancellation of Debt” at the end of the year. Home sellers must acknowledge the amount when they fill out their federal taxes. Through Dec. 31, 2012, however, the federal government forgives any tax liability associated with forgiveness of a mortgage loan.In general, homeowners believe the government will extend this tax provision. However, as evidenced by the First Time Homebuyer Credit expiration in 2010, you can’t always count on the government to bail you out.The government generally considers forgiven debt to be income. If a seller has signed legal loan papers to take out a $200,000 mortgage and the lender accepts $100,000 in a short sale, for example, the seller received the equivalent of $100,000 in free money by government estimates. As a result, the IRS taxes it. For tax year 2012, however, the government still forgives the debt; in 2013, it might not.The tax amount can be significant. On a debt of $100,000, a short-sale seller in the 25 percent tax bracket could end up owing $25,000 in income taxes.Since short sales can take months and even fall through, homeowners considering a short sale may want to start the process sooner rather than later.
If you would like to avoid foreclosure and explore other options, visit the short sale page on our website or call me at 407-227-2753.
Article from Florida Realtors