Short Sale Income Tax of a Home

Short Sale Income Tax and Foreclosure Income Tax – Short selling your home is selling your home for less than you owe on it. Your lending institution may forgive all or a portion of the difference. Previous to 2007 this difference or “short sale” was considered taxable income by the IRS.  In other words you had to pay taxes on short sales (short sale income tax). The Mortgage Debt Relief Act of 2007 allows this amount to be excluded from your taxable income under certain circumstances.

A simple example of a short sale income tax is if  homeowners had purchased a home for $120,000 and paid $20,000 toward the principle, thus reducing the debt to $100,000. At that time the homeowner was unable to keep up monthly payments. Due to the depressed housing prices caused by the recession, the highest offer the homeowners received for their home was $90,000 after fees. The mortgage company agreed to allow the short sale and transfer title of the home thus producing a short sale of $10,000. This amount would have been taxed as income by the federal government prior to 2007 but in certain circumstances is no longer taxable.

Certain provisions of this act are:

• This act covers debt that is forgiven by your lending institution for the years 2007-2012.
• The balance of the mortgage must be less than $2 million or less for a taxpayer.
• Refinanced mortgages are eligible but only the amount that qualified directly before the refinancing took place.
• Second homes, car loans and credit card balances do not qualify for this tax relief act.
• You must file a Form 982 with your tax returns.  A form 1099-C will be issued by the Mortgage Company or bank.
• This act does not exclude the amount of the short sale from being taxable under the tax laws of individual states.
• These same rules apply to foreclosed homes sold at auction for less than the amount of the mortgage.

In summary a short sale of a home does not always produce added tax liability.  A simplified explanation from the IRS is available at http://www.irs.gov/individuals/article/0,,id=179414,00.html. If you have further questions about short sale income taxe on short sales please consult a professional such as a lawyer or tax accountant for clarification.