The Tax Man
What are the tax ramifications
of a short sale?
I’m not a tax consultant. In fact I have my taxes done every year, so don’t ask me. Obviously you aren’t considering this course of action for tax reasons; but, there are some potential tax consequences, so you should see you tax consultant about what the tax obligations might be from a short sale.
A lot will depend upon how the lender treats the loss that he takes on the sale. A couple of years back it was common practice for the lenders to issue 1099’s for the amount that they forgave on the loan - treating it like money that they just gave to you and upon which you would owe taxes.
That changed some with the Mortgage Forgiveness Debt relief Act of 2007, which allows for the exclusion of “income” realized as the result of modification of the terms of the mortgage (a short sale or foreclosure) on your primary residence. Click here to read more about that act and how it might apply to your situation.
Because I’m not a tax consultant, I searched and found a bunch of good articles for you to read on the topic; however, you should still consult your own tax consultant or lawyer about any matters relating to tax liabilities that you may incur from any action that you take. In the mean time, read these:
Tax consequences of “short sale” of real estate vs foreclosure by Michael C. Gray, CPA
Questions and Answers on Home foreclosure and Debit Cancellation at the IRS Web site
Tax Consequences of Foreclosure, Short Sale and Deed in Lieu of Foreclosure from Risser Akisson, LLP Attorneys