One of the concerns in selling a home by short sale is potential tax liability. For many, the concern is unnecessary. However, not everyone is off the hook when it comes to short sales and the IRS. Let’s take a peek into the murky word of short sales and IRS tax liabilities.
Normally, under US law, when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is understood to be income for the borrower and liable for income tax to the IRS. Luckily we have the Mortgage Forgiveness Act of 2007 protecting many homeowners from huge tax burdens after a short sale.
How Does The Mortgage Forgiveness Act Help in a Short Sale?
Essentially, the Mortgage Forgiveness Act allows the borrower and lender to work together to sell a property by short sale without the borrower/homeowner having a big tax bill afterwards.
NOTE: This protection is limited to primary residences — rental properties are not eligible. Home equity lines may not be covered by the Act. The debt forgiveness tops out at a cool million per year. Lastly, the Mortgage Forgiveness Act will go away in 2012 unless the gang on the Hill vote in another extension. Many say this is unlikely since the government needs a lot of revenue these days.
For those of you who would like to read the IRS interpretation of the Mortgage Forgiveness Act, we have a link to the publication and it includes a link to IRS form 982 that people who have completed a short sale need to file. Click here to read the IRS article on Mortgage Forgiveness.
Just so you know, we are not CPA’s or Tax Attorneys… we’re just a couple brothers who love helping people with their real estate questions and needs. Thus, we’ve turned to some professionals to provide the information in this article. Since these are not our own thoughts, we take the Mission Impossible pledge disavowing any knowledge of our what these pros have told us and we advise you seek the counsel of your own tax attorney when considering a short sale.
We hope we’ve given you good insight into the tax consequences of a short sale in the Phoenix, AZ market as well as the Mortgage Relief act of 2007. If you have more questions about short sales, we have a number of short sale articles and we are always delighted to help personally, just give us a call or toss an email our way.
The Urban Team at Realty Executives
7600 N. 16th Street, Suite 100
Phoenix, AZ 85020